Transferring wealth when a family member passes away can prove to be a complex and confusing process. Inheriting a retirement account is not as simple as depositing the money into your bank account — there are stringent guidelines to follow, tax ramifications to keep in mind and long-term benefits and disadvantages to consider. IRS requirements and policies continually change, so make sure you talk to your J.L. Bainbridge financial advisor before you make any decisions.
As rules vary based on the type of beneficiary and retirement fund, today we’ll only be focusing on spouses who inherit their partner’s traditional IRA account. Here are several common questions we often receive from clients in this particular scenario.
What if I want to transfer the account to my IRA?
Fortunately, laws tend to favor spousal beneficiaries who are named the Designated Beneficiary of the account. Unlike non-spousal beneficiaries, the surviving partner is allowed to roll over the plan into their own personal retirement account. We generally advise this course of action, as the account will be treated as the surviving spouse’s own IRA and the required distribution and starting date will be determined in the same way as for any other participant in the plan. Keep in mind that once benefits are distributed to the spouse, the transfer to the retirement account must be made within 60 days.
What if I don’t do anything to the account?
When a spouse decides to leave the money in the original owner’s plan or roll it over into an “inherited IRA” under the name of their partner, they are required to begin taking the minimum required distributions by Dec. 31 of the year after the owner’s death. However, keep in mind that this only applies if the owner died on or after his/her required beginning date, which occurs on the first day of April after the participant reaches age 70.5.
What if my spouse died before the age of required distribution?
If the account holder passed away before the age of 70.5, be aware that the beneficiary is often required to claim the entirety of the account within five years or elect for the life expectancy payout method. For tax purposes, the latter is generally recommended. Your annual distributions will be spread out over your lifetime, and you’ll usually be required to start taking them at the normal distribution age of 70.5.
What if I’m not the sole beneficiary?
It’s not uncommon for someone to leave their retirement account to a spouse as well as other family members (often their grown children). In this case, the surviving spouse can roll over any distributions into his/her own retirement account and the same guidelines as noted in the answer to the first question will be applied.
Are you the beneficiary of a retirement account? Give us a call. We would love to help you through the process and settle on the best outcome for your financial future.
The information being provided today is for educational purposes only and shall not be considered specific individual investment advice or recommendation. The information being provided is believed to be accurate at the time of distribution. However, over time may become materially inaccurate or may not apply to your specific circumstances. Please refer to our ADV for detailed information about our services and disclosures. You may request a copy of our ADV by contacting 941-365-3435. In addition, please refer to https://www.adviserinfo.sec.gov/IAPD for additional information on the firm and the Investment Adviser Representatives.