Slott Report Mailbag: When Is a Spouse’s Consent Required for IRA Beneficiary Exclusion?

By Joe Cicchinelli, IRA Technical Expert

Follow Me on Twitter: @JoeCiccEdSlott

This week’s Slott Report Mailbag answers questions running the gambit of financial planning – from the 403(b) employer plan side to IRA beneficiary rules and the Roth conversion conversation. We also answer a question that is state-specific regarding IRA beneficiary exclusion. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

Ed,

If my company matches my Roth 403(b) contributions, do I have to track the employer (pre-tax) contributions separately from my Roth 403(b) contributions, or should my employer be contributing the matching contributions to my 403(b) plan? I’m concerned both might be going into the Roth 403(b), which would result in a pro-rata distribution when I start taking my distributions.

Thank you,

Jeff

Answer:
The plan must track the employer and employee contributions as well as the “regular” 403(b) portion and the Roth 403(b) portion. The match must be allocated to the regular portion of your 403(b) account. If you believe that there is a mistake on how the plan is allocating the contributions, you should ask the plan administrator.

2.

I have a question regarding distribution of an inherited IRA.

I am the executor of my mother’s will. She has an IRA, which she makes monthly withdrawals from. She has no other savings and just a checking account that depletes monthly.

Her IRA will be split amongst four children. As the executor, how do I have monies taken from the IRA to pay off her debts before it is distributed as per her IRA beneficiary form?

The only money that will be available to pay off the debts will have to come from the IRA.

Thanks,

Jay Lewis

Answer:
Assuming your mom has passed away, because the estate is not the IRA beneficiary, you do not control the IRA funds. Each of the four children as beneficiary controls their own portion of the IRA. If any child uses their portion to pay off mom’s debts, that child will still owe income tax on the inherited IRA distribution. The children may want to disclaim the IRA and then, if the funds go to your mother’s estate, there will be money to pay off her debts. You should speak to an estate planning attorney, CPA or financial advisor before taking a distribution.

3.

When is a subsequent spouse’s consent required for exclusion as a beneficiary? Would the answer be affected by the fact that the IRA is fully funded prior to the marriage? For information purposes, the primary beneficiaries are children and grand children from a previous marriage.

Answer:
Under federal law, spousal consent is not necessary to name an IRA beneficiary. However, spouses have rights under state law. For example, if you live in a community or marital property state, spousal consent is generally required to name someone other than the spouse as the beneficiary of an IRA. Those states are Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

4.

Hi Ed,

Love your articles. I have a scenario-related question. I never considered the possibility of a Roth conversion due to my higher income years, but it may make sense as I wind things down.

I am 60 and contemplating full retirement. My wife (58) and I have about $1.3 million in traditional IRAs. We plan to collect Social Security at 66 or delay a bit. We have over $1 million in our brokerage account (all long-term positions earning qualified dividends).

Unless I starting draining IRAs, required minimum distributions (RMDs) on top of my social income will drive my tax bracket up considerably down the road.

I am in an “income trough” for the next 6 years. Conventional wisdom says to use taxable accounts first in retirement, but it would seem to make sense to convert $60-80k per year of IRA funds to Roth over the next 6-7 years while living off my taxable account. Our cash needs are low enough that I could do this and stay in the 15%-25% tax bracket during these years and cover the distribution taxes.

Down the road, I will have a tax-efficient taxable account and healthy Roth accounts that are post-tax.

Does this strategy make general sense?

Thanks,
“xcrider”

Answer:
Generally, moving funds from taxable IRAs to tax-free Roth IRAs can be beneficial. The Roth IRA benefits are tax-free income in retirement – keeping taxable income low, even when taxes increase. Also, there are no required distributions for Roth IRA owners. If you will not need the money soon or at all, the Roth conversion can be an excellent and effective estate-planning vehicle. However, you should discuss this with an advisor beforehand. The new taxes this year on net investment income, the return of phase-outs for deductions and exemptions, and the new higher income tax bracket could all be affected by a Roth conversion.