Deceased before 59.5
I have client whose husband deceased before 59.5 and she is under 59.5 as well and needs some from his Retirement Account. Can she withdraw money without a penalty? How should this IRA be titled? I am under the impression that if she rolls it over to her own name that if she then takes a distribution she will be penalized. Please advise. Thank you.
Permalink Submitted by Alan Spross on Wed, 2008-10-01 20:26
You are correct. If she rolls it over to her own IRA and takes distributions prior to 59.5, she will pay the early withdrawal penalty unless a 72t (SEPP) plan is set up. In most cases a 72t should be a last resort option because of it’s lack of flexibility.
You did not indicate what type of plan was inherited, but if it was an employer plan, some plan custodians hesitate to transfer assets to an inherited IRA. Authority to establish a spousal inherited IRA to receive an employer plan transfer (must be direct transfer) is based on PLR 2004 50057. It should get done, but may take some persistance. The inherited IRA should be titled, “Ann Smith, as beneficiary of Carl Smith”. Some custodians prefer a different order, but both the survivor and decedent’s names must appear and each be identified.
If the original account is an IRA, there should be no such problem establishing the beneificary account.
Permalink Submitted by Jose Morales on Wed, 2008-10-01 20:27
If she is the beneficiary of her spouses IRA then she can take distributions from the IRA with no tax penalty, even if she is under the age of 59 1/2. Death of the IRA owner is one of the exceptions to the premature distribution penalty. Most financial institutions are going to want her to either move the funds into a new Beneficiary IRA or into an IRA in her own name. If she is under 59 1/2 and wishes to continue taking distributions with no tax penalty then she is going to want to opt for a Beneficiary IRA. The way the account is titled will have more to do with the procedures of the financial institution than any IRS regulations. Generally beneficiary IRAs are titled as follows:
Jane Smith
Beneficiary for the the IRA of Joe Smith
Permalink Submitted by Jeff Stanga on Wed, 2008-10-01 20:35
Thank you. So it seems that ANY inherited IRA regardless of age of the deceased and the inherited can have distributions penalty free. I.E. I (40yrs old) decease today and my wife can take a distribution from an inherited IRA with no penalty, just pay the tax.
Permalink Submitted by Alan Spross on Wed, 2008-10-01 21:14
Right.