spousal IRA vs decedent IRA
Hello
My recently widowed client is 62, and her husband was age 58. She is named the beneficiary of both his rollover IRA as well as his 401k.
My question is what factors should be taken into consideration as regards determining all of her options for titling?
Thank you
Permalink Submitted by Alan Spross on Fri, 2008-09-19 23:26
The first factor is that no matter how she titles the account, she can access funds without any early withdrawal penalty since she is over 59.5. Therefore no need for planning around the penalty if she needs funds shortly.
The next factor relates to how long she wishes to defer RMDs. Assuming that she is the sole beneficiary on both plans, if she assumes ownership, her RMDs start in 8 years. However, if she maintains these in inherited status, her first RMD year is the year her husband WOULD HAVE reached age 70.5, which is 12 years, an additional 4 years of having no RMD requirement.
There is also a rule that if she chose to maintain the accounts in inherited status and named her successor beneficiary, but passed prior to the RMD requirement, the designated beneficiary would still get their own stretch because the surviving spouse would be deemed to be the owner (Pub 590, p 37). This benefit stops in the first RMD distribution year, so the rollover to the survivor’s own IRA should not be delayed beyond the end of the year prior to the hear her husband WOULD HAVE reached 70.5.
Keep in mind that the survivor can assume ownership at anytime, BUT once ownership is assumed, the IRA cannot be returned to inherited status.
If survivor is the sole beneficiary, she can also convert to a Roth IRA anytime she is eligible.
Also, because the tax code has not yet been amended, there may be some resistance to rolling over the 401k to an inherited IRA. This provision is still based on a 3 year old PLR.
While not related to your question, be sure that the 401k account is checked out for NUA potential if it contains highly appreciated employer stock shares. In that case, transferring those shares to a taxable account as part of an LSD may be the best move, with the rest of the 401k being directly rolled into an inherited or owner IRA. NUA should be considered only after getting a cost basis quote on the shares and then crunching some numbers. Note that the long term future of a max LT cap gain rate of 15% is questionable, it could well be increased particularly for higher bracket taxpayers.