BSpouse inheriting IRA as beneficiary IRA
Good morning,
I have two separate clients who have each lost their spouses within the last two years. One couple was 45 each when he passed away and the other couple was 38 and 40 when she passed away. My financial planning team has told me unequivocally that titling the inherited IRA as “ABC Cust Beneficiary IRA FBO Jane Smith B/O Bill Smith” allows the spouse who inherited the IRA the flexibility to use the IRA assets pre 59 1/2 and AVOID the 10% early distribution penalty, should they need to use the money pre 59 1/2 (in an emergency type situation). I am told that had we just titled the inherited IRA in the surviving spouse’s name it then becomes their own IRA which would be subject to the early distribution penalty should they need it pre 59 1/2. I am also told that we can switch the beneficiary IRA to their own IRA at any point in the future should we wish to. Any comments on this would be sincerely appreciated. Thank you.
Permalink Submitted by Alan - IRA critic on Wed, 2017-07-26 16:25
All those statements were correct. To retain the inherited IRA status the title must only identify the name of the beneficiary and the name of the decedent. The order does not matter, and custodians usually have their own format for the inherited IRA title. RMDs for sole spousal beneficiary inherited IRAs do not begin until the year the deceased spouse would have reached 70.5, but any non RMD distributions are coded as death benefits on the 1099R (Code 4) and are penalty free. The surviving spouse would usually assume ownership of the IRA at 59.5, unless perhaps they were older than the decedent and wished to delay RMDs for a longer period of time.