Spousal Beneficiary Options

Submitted by Julie Brangenberg on Mon, 2013-02-25 14:11

I have a client (husband) who was the IRA owner. He passed away @ 69 years old. His spouse in the beneficiary. She has three options, two of which are Beneficiary IRA or Assume Ownership. She is 62. What are the pros and cons of each?



Submitted by Julie Brangenberg on Mon, 2013-02-25 16:47

The spouse above decided to assume ownership of the Roth above.  She said that she may need to take money out to pay for husband’s funeral though.  I have two questions:1.  Should we choose Treat IRA as Own or Direct Transfer to Beneficiary IRA option for her? What are the pros and cons of each?2.  If we choose Treat IRA as Own, and setup a Roth IRA for her,  will she have to prove 5 year holding to avoid tax on earnings?  Can she use his time in the Roth for the 5 year rule? 

Submitted by Alan - IRA critic on Mon, 2013-02-25 17:05

  • She should assume ownership, typically done by rolling it over to a Roth IRA in her name. There is no downside of doing this since it will avoid RMDs and since she is over 59.5, even if she distributed earnings before 5 years there is no penalty. The 5 year holding period begins Jan 1st of the first year husband made a Roth contribution and continues to run after his death. Any distribution she takes before the 6th year will have to be reported on Form 8606 and she will need to know his total basis of regular and conversion contributions to complete the form. Any earnings come out last and as long as she does not take out more than the contributions, distributions are tax and penalty free. Once the 5 year holding period is met, the accounting can end and Form 8606 is no longer needed to report distributions.
  • It would be rare for the IRS to request documentation of the first contribution, but if she saves any statement evidence or Form 5498 for ANY year more than 5 years back, that would document that the Roth is now qualified.
  • In her situation there is no benefit of maintaining the Roth as inherited. Ownership is better in all respects.

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