Don’t Inherit a Mess When Your Spouse Passes Away: This Week’s Q&A

This week’s Slott Report Mailbag looks into inherited IRAs, spousal rollovers, and 401(k)’s.  As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.

Question:

Dear Mr. Slott,

I am 83 years old with both a Traditional and a Roth IRA with Vanguard as the custodian of the retirement account. My wife is 73 years old and has a traditional IRA in a retirement account with Charles Schwab. She is my sole beneficiary on both IRA’s. If I understand correctly, the proceeds in my accounts must be transferred to her within 60 days of my death. If she wants to open an account with Vanguard I assume Vanguard does the paperwork and if she transfers it to Schwab, then Schwab does the paperwork.  Is a certified copy of my death certificate all that’s needed? Am I correct on the transfer process?

Thanks for your input.

Jerry

Answer:

Hi Jerry,

While no one likes thinking about death, you are smart to be proactive about what will happen to your IRAs down the road. You are right that the custodian of your IRA will likely require a death certificate. When this is received, the custodian will establish an inherited traditional IRA and inherited Roth IRA. Your wife as your sole beneficiary will then have a choice of keeping the funds as inherited IRAs or doing a spousal rollover. Most likely, based on both your ages, the spousal rollover will be the way to go. She should seek the advice of a knowledgeable tax or financial advisor to determine what is the best course of action. There is no requirement that the funds be transferred to her name within 60 days of your death.

Your wife can do a spousal rollover by direct transfer or by 60-day rollover. The once-per-year rollover rule applies to spousal rollovers. This means she cannot do a 60-day rollover of both the traditional and Roth IRAs she inherited from you. For this reason and many others, transferring is the better way to achieve a spousal rollover.

Your wife can decide whether to stay with your current custodian or move the IRA funds to a new custodian. She will need to establish IRAs and name beneficiaries. She has the option of combining your traditional IRA funds with the traditional IRA she already has. Each IRA custodian will require its own paperwork and have its own specific procedures.

Question:

Ed,

I was listening to you as a guest on Jill Schlesinger’s podcast.  I think you said that if your company has a 401(k) Roth option you prefer people invest in that first over a regular 401(k). I always thought that the 401(k) was so powerful because you are not paying taxes on that income. I’ve maxed out my 401(k)’s for years and done the Roth IRA backdoor option.  Please advise.

Thanks,

Andrew

Answer:

Hi Andrew,

When you contribute to your 401(k), you are not paying taxes on the amount you contribute but, and it is a big but, you will have to pay taxes eventually when you take distributions. The earnings in your 401(k) are only tax-deferred. They are not tax-free. Eventually, Uncle Sam will want his share.

With a Roth 401(k), you do not get a tax deduction when you contribute, but if you take a qualified distribution from your Roth plan, all the funds, including the earnings will be tax-free. Tax-free is better than tax-deferred, so for many people the Roth 401(k) will be the way to go if they have that option. You can even contribute to your Roth 401(k) and do a backdoor Roth IRA contribution in the same year to put away the maximum in your Roth accounts.

Of course, when it comes to retirement planning, there is no one size fits all. Everyone’s situation is different. If you have questions about where your money should be going, into your 401(k) or your Roth 401(k), your best bet is to talk to a knowledgeable tax or financial advisor.