widow’s rights/obligations with 72T
I have a current client who has terminal leukimia and is expected to only live a few more weeks. He has several years left before he would turn 59.5 and is currently taking money from his IRA on a 72(T) plan. Once he passes on, his wife, who just turned 55, will become the owner of the IRA. So what is the status of the 72(t)? Must/Can she continue taking the money out on the same schedule? Does she roll the money over into her own IRA and continue taking the distributions? Does she roll it into an inherited IRA (my guess) and continue taking the distributions until she turns 59.5 and can then roll it into her own IRA? I’m just not clear on the rules in this situation.
Corallary to this, her husband also has a 401(k) which she will inhereit with several hundred thousand in it. He is also 55. Once he passes on, should she leave the money in the 401(k)? Can she withdraw money from the 401(k) without penalty since both she and he are over age 55? If she rolls it into an IRA, and needs to take out money we would have to set up another 72(t). It would seem to me that there would be more flexibility leaving the money in the 401(k) until she turns 59.5. They have substantial assets in retirement plans, but almost nothing in non-retirement plans. The wife doesn’t work, so after the life insurance money runs out, we will have to start tapping the retirement money. Based on her needs, she should have more than enough to last her lifetime, but not if we’re paying 10% penalties on top of the regular income taxes.
Thanks for your collective knowledge.
Michael Terry, CFP
Permalink Submitted by Alan Spross on Fri, 2011-01-07 18:44
Michael,
Upon his death, the 72t would simply end and the surviving spouse would have no further obligations with respect to the plan. The death benefit coding on the 1099R for any post death distributions should be sufficient notification to the IRS. The only problem here would be in more than the current annual amount was taken out prior to his death, which would mean the plan was modified prior to his passing. Here is the relevant provision from RR 2002-62:
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(c) Section 72(t)(4) provides that if the series of substantially equal periodic payments that is otherwise excepted from the 10-percent tax is subsequently modified (other than by reason of death or disability) within a 5-year period beginning on the date of the first payment, or, if later, age 59 1/2, the exception to the 10-percent tax does not apply, and the taxpayer’s tax for the year of modification shall be increased by an amount which, but for the exception, would have been imposed, plus interest for the deferral period.
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The surviving spouse would normally maintain the IRA in inherited format until she reached 59.5 in order to avoid the penalty on any distributions she needed, but she would not have any RMD obligations until the year the client would have reached 70.5. She will reach 59.5 prior to that year and can then do the rollover to her own IRA as you suspected. She also inherits any unrecovered basis from non deductible contributions made by the client and documented on Form 8606. She should immediately name successor beneficiaries when she inherits the IRA.
Likewise, she can take penalty free distributions from the inherited 401k, and any highly appreciated employer stock in the plan might make use of NUA viable. If her retirement plan assets are substantial enough and there are no Roth assets, a conversion strategy may also be appropriate. Obviously, a comprehensive plan is needed now with a major priority being avoiding the early withdrawal penalty by not rolling over too much prior to 59.5. The plan administrator can advise on how flexible the distributions options from the plan are. The plan can also be rolled into an inherited IRA as well if you want to consolidate the funds. Does not sound like she needs the extra creditor protection available in the 401k plan.
Permalink Submitted by mk foss on Fri, 2011-01-07 19:07
If he is terminally ill, he meets the IRS definition of “disabled” and could stop the formal 72t program and just withdraw amounts as needed – more or less than what he’s doing now.
I hope that additional flexibility helps in the time he has left.