No one wants to think about losing a spouse, but it’s good to understand how finances work when one does. For example, inheriting an IRA from your spouse can get complicated. Consider the following points.
Age is important
It generally makes sense to roll over an IRA inherited from a spouse to your own IRA if you’re age 59½ or older when you inherit it. Why? You can withdraw money from your IRA if you need to without worrying about the 10% early withdrawal penalty. And the rules for taking annual minimum distributions from the IRA won’t apply until you turn age 70½.
If you’re younger than age 59½, you may be better off setting up an inherited IRA in your deceased spouse’s name. Withdrawals from an inherited IRA aren’t subject to the 10% early withdrawal penalty regardless of the beneficiary’s age.
With an inherited IRA, most beneficiaries must take required minimum distributions every year based on their life expectancies (generally starting the year after the IRA owner dies). However, with an IRA inherited from a spouse who dies before age 70½, the surviving spouse can postpone taking required minimum distributions until the year the deceased spouse would have turned age 70½.
In either scenario, withdrawals will be subject to federal (and possibly state) income tax unless they’re qualified Roth IRA distributions.
Extra Tax Tip- Look for Form 8606! One should always review prior years’ tax returns to see if the spouse filed a Form 8606- Non-deductible IRAs. It is possible that a portion of the IRA has a non-deductible component. Upon making subsequent withdrawals, a portion of the withdrawal will be non-taxable.
Look at the big picture
Before making any decisions, meet with one of our financial professionals to review your overall financial situation. For example, maybe you’d be better off spending life insurance proceeds than taking money from an IRA prematurely. Also, we work together with your investment advisor to review how the IRA assets are invested in terms of your financial needs and overall investment program.
To learn more about tax rules and regulations, give us a call today. Our knowledgeable and trained staff is here to help.
