2 Important Considerations When Inheriting a Retirement Account
When a spouse passes away, the list of things the survivor must do may seem endless. In the weeks following their death, there are decisions to be made, paperwork to be completed, and lots to track down. Suppose a surviving spouse is the primary beneficiary of a retirement account (such as a Traditional IRA, Roth IRA or 401(k)). In that case, there are special considerations and options available to that beneficiary for how they receive that account. The IRS incentivizes individuals to save into retirement accounts and thus puts specific rules in place for how funds can be withdrawn from the accounts.
A surviving spouse can elect to receive the retirement account via a “Spousal Rollover” or an “Inherited IRA.” Each person in this situation must evaluate their income needs and sources of income and coordinate which approach is the best for their needs. To make the best decision, they must determine at what age they need to pull money from these accounts.
- If a surviving spouse inherits a retirement account and elects the Spousal Rollover, they receive that account as if it were theirs from the start. In that case, the beneficiary must begin making withdrawals from this account at the age of 72 – these are called Required Minimum Distributions. The IRS determines how much needs to be withdrawn from the account each year, and the withdrawals must be made from the account. Importantly, if the spousal beneficiary elects this treatment, any withdrawals that they make before age 59.5 would be subject to a 10% penalty tax in addition to ordinary income tax (for Traditional IRAs and 401(k) accounts).
- For spouses who inherit a retirement account and need the money in that account before age 59.5, they should consider receiving it as an Inherited IRA because they can withdraw money from the account and will not be subject to a 10% penalty. If the deceased spouse was the primary earner and there are significant assets in the retirement account, the flexibility to withdraw money penalty-free from the account before age 59.5 could be crucial to that person’s cash flow and financial plan.
Beneficiaries should work with a financial advisor to develop a financial plan and know how to meet their cash flow needs before determining how to claim the retirement account. There are also different rules depending on the age of the deceased who owned the retirement account, so seeking professional advice on how to receive this account is crucial to their future.
Dave Deschamps is a Wealth Manager and the leader of the Widows Practice Group at BDF. Dave enjoys bringing clarity to the big picture questions while filtering out a lot of the distractions. Drawing on over a decade of experience as a CERTIFIED FINANCIAL PLANNER™ professional, he’s able to help clients balance the financial implications along with the emotional considerations when making important decisions.