IRA titled in my name vs inherited IRA where I am beneficiary of my spouse
Hello,
My husband died this year at age 68. I am 69. He had an employer sponsored 401K and a personal IRA. I am named as the sole beneficiary on both accounts.
I am trying to figure out the best way to now handle those accounts. The IRS lists three options: 1) retitle them in my name and treat them as my own, 2) rollover the funds into my IRA (I also have an SEP IRA and a Keogh Profit Sharing), treating them as my own or 3) take them as an inherited IRA where I am the beneficiary.
I am wondering if I should consider option 3 because, as I understand it, it puts off RMDs on his accounts (roughly half of our retirement savings) by one year. Is it worth doing that, and if I do, can I and when would I roll it into my account? If I choose option 3, is the account in my name, or his name (and would it be exposed to any potential professional liability claims that could arise after his death –he was a dr.)?
Can the funds in his accounts be combined ( and would that be advisable or not)?
Finally, can anyone explain the real difference between option 1 and option 3.
Anything else to consider?
Thank you so very very much.
Permalink Submitted by Alan - IRA critic on Wed, 2021-11-10 00:43
Sorry to hear of your loss.
If you keep the 401k titled as inherited, since you are sole beneficiary, that would delay your RMDs for 1 year if he was one year younger than you at the end of the year. Your beneficiary RMDs would not start until the year he would have reached 72. I don’t know if one year longer to start RMDs is worth giving up the simplicity of rolling it over to your own IRA now. But before you decide, you should check if the 401k holds any highly appreciated employer shares which would be eligible for NUA. If you take distributions from the 401k or roll it over to an IRA, the NUA option is forfeited. Also, note that in some states the inherited 401k will have better creditor protection than IRA accounts. It depends on your state.
You cannot become the participant (owner) of the 401k, only a beneficiary and once your beneficiary RMDs begin, they will be considerably higher than RMDs from an IRA you own. If you want to avoid the higher RMDs of an inherited 401k, you should roll it over prior to the year he would have reached 72.
All that said, in your case creditor protection issues may trump the simplicity or lower RMD benefits. The inherited 401k will provide you more creditor protection than an owned or inherited IRA in some states. I would check with a local attorney to determine your potential liability against malpractice claims with these various accounts. Does his estate continue to carry malpractice insurance in the case of late filed claims?
The 3 options you listed only apply to the inherited IRA. You cannot be treated as the owner of the inherited 401k so Option 1 does not apply to the 401k, but you can roll it over to your IRA if that does not reduce your creditor protection in your state.
If your Keogh and SEP IRAs are no longer active, you can roll them over to an IRA. But you must determine if the inherited plans should be kept separate from your own accounts or not due to the creditor protection issues in your state and how they apply to surviving spouses.