May 30, 2013

The loss of a spouse is a very trying time. Grieving the loss of your loved one, handling funeral arrangements and saying goodbye can seem overwhelming. Unfortunately, dealing with your spouse's IRAs and investment accounts can be challenging as well.

While there are several ways to handle IRAs from a deceased spouse, here are some of the most common and least complicated ways to deal with their retirement accounts.

  1. Spousal IRA Rollover - Only spouses can roll funds into their own IRA. This allows for the IRA to maintain its tax-advantaged status, avoiding immediate payment of income taxes. You are also not required to begin distributions from your IRA until reaching age 70 1/2 . You may only select this option if you are the surviving spouse of the original account owner, and the sole beneficiary of the account. With this option, you could also consider rolling some of the IRA assets from your spouse into a Roth IRA (makes sense if you anticipate being in a higher tax bracket in the future)
  2. Inherited IRA - If you choose to "inherit" the IRA, you must withdraw from the account over a fixed period of time. If older than your spouse, you may delay taking distributions until the year in which your spouse would have reached age 70 1/2 , or December 31 of the year following your spouse's death, whichever is later. The amount you take in a distribution is calculated using the longer of the deceased's remaining life expectancy or your life expectancy. How do you determine your life expectancy? The IRS has a table for calculating your life expectancy
  3. Lump-sum distribution - Regardless of age, you may receive funds from the account with the 10% early withdrawal penalty that you would have to pay upon taking a premature distribution (prior to age 59 1/2 ) from your own IRA. However, you are still responsible for paying income tax on the entire amount that you take as a distribution. This could have a substantial impact on your tax bracket, and you should always consult your tax professional before taking a lump-sum distribution.
  4. Disclaiming the IRA - This option can be used if you don't really need the money, or would prefer them to pass to the deceased's secondary beneficiary (in many cases, your children). In this case, your children would have to begin withdrawals under the rules for non-spouse inheritors.

Before making a final decision, it is a great idea to speak with your financial advisor, and or your tax consultant. They can provide more details specific to the option that may be best for you. For further reading, the IRS has an entire page dedicated to handling IRAs upon the passing of a loved one.

Chuck Wade

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).