Three Key Investment Strategies Hidden in Plain Sight Plain Sight Strategy #2: Manage Market Risks
Written by Andrew Hunt
Written by Jason Hiley
If you outlive your spouse, you’ll need to make a number of financial decisions that will have a lasting effect on your financial future. One of the most crucial decisions pertains to IRAs or retirement plan benefits.
As a spousal beneficiary of one of these accounts, you must consider your age, your spouse’s age, and your financial needs in order to make a wise choice. The following are your primary options:
1) Outright Distribution: This IRA option lets you take money out of the account thus relinquishing the tax-deferred status. The money becomes completely taxable in the year of the distribution. This method is generally not preferable unless you need funds immediately.
2) Inherited IRA: With this option, you elect to transfer the assets into an IRA in which you are the sole beneficiary. If your spouse was younger than 70½ at the time of his or her death, you can delay taking any distributions until the year in which your spouse would have reached 70½. This can be an appealing option if you were older than your spouse because this method allows you to continue to defer the assets in the IRA for a longer period of time.
If your spouse was 70½ or older at the time of his or her death, then you must begin taking withdrawals by December 31 of the year following your spouse’s death.
If you are younger than 59½, an inherited IRA can be a good choice because withdrawals are not subject to the normal 10% early-withdrawal penalty.
You can elect to turn an inherited IRA into a spousal rollover IRA (see below) if that method becomes advantageous.
3) Spousal Rollover IRA: With this option, you elect to treat the IRA or qualified plan as if it were always your own, so normal IRS distribution rules apply. The money may stay in the IRA and continue to grow tax-deferred until you turn 70½. At that point, normal Required Minimum Distribution rules apply.
This option makes sense if you’re not 70½ but your spouse was at the time of his or her death. It allows you to continue to defer any required distributions until you turn 70½, so you can take advantage of the longer tax deferral. The drawback to this method, however, is that normal distribution rules apply, so you will not be able to distribute money from the account without incurring a 10% penalty until you turn 59½. If you think you may need to access the fund prior to age 59½, you should consider using the inherited IRA method.
For more information on IRAs and retirement plan benefits, go to www.irs.gov, or call us so that we can help you determine your best course of action.
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