Unfortunately (at least for most of the people..) – sometimes we should deal with inherited plans of our lovers.
Inheriting an asset may be the blessing you've been wishing for or the bane you've been trying to avoid. That is if you're clueless about what to do about it. Most probably, you want to make these assets work for you especially if this were an IRA account. What you need is a way to maintain their tax-advantaged growth while avoiding the irksome impact of urgent income taxes.
Carefully Review Your Options
Many options are actually available for you but they depend on your relationship with the original owner of the account. Scroll down to see the different choices on what to do with the inherited IRA account. We advise you to seek legal or professional advice if you are concerned about creditor protection. In 2014, the Supreme Court ruled that federal bankruptcy laws do not protect inherited IRAs but state laws still vary.
Spouse Inherited IRA – The Different Choices
If you have inherited an IRA directly from your spouse, here are the things you can do:
- Roll over the assets into your own traditional IRA
- Transfer your inherited assets into an inherited IRA
- Roll over and convert the inherited IRA assets to your own Roth IRA
- Disclaim all (or part) of your inherited assets
- Leave it all in the plan
1. Roll Over The Assets Into You Own Traditional IRA
As a spouse who directly inherits your spouse's IRA or workplace savings account, there is one option available only to you. As a surviving spouse, you can transfer the IRA you've inherited into your own IRA. You can then treat this asset as your own. However, the registration type of both IRAs should be identical. This means that you can only transfer a traditional IRA to a traditional IRA. The same rule will apply for a Roth IRA.
This option gives you two benefits. The amount and the timing of minimum required distribution (MRDs) would depend on your own age.
There is another benefit for this option. Your MRD will follow the Uniform Lifetime Table, which assumes that distributions would extend over two lives. They will extend over yours and a beneficiary who is 10 years younger than you. Using this option, your MRD would be lower than if you had transferred your assets to the inherited IRA.
This option would be preferable if you meet the following conditions:
- You are younger than your spouse
- Your spouse died after the age of 70 ½ (this would allow you to delay taking the MRDs until you turn 70 ½
- Older than 59 ½or you don't need to touch these assets until you're 59 ½ (since you would not be subjected to the 10% early withdrawal penalty)
2. Transfer Your Inherited Assets To An Inherited IRA
Your next choice is to transfer your inherited IRA or 401(k) to another inherited IRA. With an IRA, they will use your age as a basis for the amount of your minimum required distributions. They will recalculate each year using the factors in the IRS Single Life Expectancy Table.
Your spouse's age at the time of death will affect the timing of the initial distribution.
This is how it plays out:
- If your spouse is older than 70½, you must begin taking MRDs by December 31 of the year following your spouse's death.
- If you are younger than 70½, you may choose to delay the MRDs until your spouse should have turned 70½.
Also, If you are not concerned about creditor protection, it may be advantageous to transfer assets to an inherited IRA.
However, you must meet these conditions:
- You are older than your spouse and your spouse died before age 70½. This is because you can delay the MRD until your spouse should have turned 70½.
- You are younger than 59½ and you need to access these assets immediately. That way, you can avoid the 10% penalty for early withdrawal.
3. Roll Over And Convert Your Inherited IRA To Your Own Roth IRA
If you directly inherit your spouse's IRA or 401(k), you may convert it into a Roth IRA in your name.
A Roth IRA is a great way to grow money tax-free. Aside from potential tax-free asset growth, a Roth IRA has no MRD during the lifetime of the original owner. However, the money you move from a non-Roth IRA to the Roth IRA is taxable. You will have to pay taxes for it.
This option is advantageous if you expect higher taxes in retirement. Plus, you should have the funds from other sources to pay the required tax now.
4. Disclaim All (or part) Of Your Inherited Assets
You may disclaim or refuse to accept all or part of your inheritance.
Why would you do this?
Well, after checking with your advisers, you may realize that you don't need or want all or part of them. Or maybe it will cost you more at the moment to keep them. There are a lot of reasons.
If you do so, they will pass the disclaimed inheritance directly to the next eligible beneficiary. The IRA should specifically name the next beneficiary. Otherwise, they will follow another method of succession. They will apply the provisions of the IRA Custodial Agreement and Disclosure Statement. The MRD will then depend on the age of the other beneficiary rather than your own.
If the other beneficiary is younger than you, it stretches the potential for tax-deferred growth in his or her favor.
Your spouse named you as the primary beneficiary of the IRA and your son as a contingent beneficiary. If you disclaim your inheritance after complying with the requirements, your son would inherit all the IRA assets. They will use your son's age or life expectancy to determine the MRD. Naturally, it would be lower, thereby leaving more assets in the account. The more assets there are in the account means more potential for tax-deferred growth.
Disclaiming part or all of your IRA inheritance would be profitable under certain circumstances. Among these are:
- You don't need all or some of the assets.
- You want a younger beneficiary to maximize the potential for tax-free asset growth.
- The deceased estate is not ideal for estate tax purposes.
You need a disclaimer to be able to do this. Your disclaimer effectively authorizes the transfer of your inherited IRA to go to another beneficiary.
Generally, assets left by the spouse to the surviving spouse is not subject to estate taxes. However, when the surviving spouse dies the inheritance becomes part of the estate. So, if you can afford it and it's not against your goals, you may want to consider it. You may disclaim only an amount up to the estate tax exemption limit. This way, you can take full advantage of your estate tax exemption.
Here's an important reminder:
If you want to avail of this option, you must file the disclaimer within nine months of the IRA owner's death. Make sure that you have not yet taken possession of those assets. A disclaimer will irrevocably give up your right to inherit the IRA assets. So, be sure to consult a tax or legal advisor about this option. Verify if the deceased's state of residence requires an Inheritance Tax Waiver in this case.
5. Leave It All In The Plan
If you've inherited a workplace savings account, you can take a different approach. You may opt to leave the assets you have inherited in the plan. Some details may vary depending on each plan so you should discuss that option with the plan administrator.
You could transfer the Retirement Plan's assets to an Inherited Retirement Plan Account and leave the assets in the plan. However, you must take the Meds according to the plan's distribution options open for spouse beneficiaries. Also, the administering employer must continue to administer the plan.
If the deceased was also the sponsoring employer, then an Inherited Plan Account is not an ongoing option. If the deceased was over 70½ and still owed any MRD at the time of death, you should follow this. You must generally withdraw the appropriate amount by December 31 of the deceased owner's year of death. During that year, they will distribute the MRD to you based on the original owner's MRD schedule. However, they will distribute it under your own tax ID number. You cannot roll over MRD amounts.