Wes Moss: A checklist for inheriting an IRA

(Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.)

“Of two things you can be certain, death and taxes.”  – Benjamin Franklin

Wes Moss hosts 'Money Matters' Sunday mornings on AM750 and 95.5FM News/Talk WSB.

Wes Moss hosts 'Money Matters' Sunday mornings on AM750 and 95.5FM News/Talk WSB.

Sadly, those two unavoidables often present themselves at the same time.

If your spouse owned an IRA at the time of his or her death, you will need to make some decisions. Depending on the situation and relationship of those involved, there are a myriad ways to handle the situation.

First off, don’t feel the need to rush out and find something to invest the proceeds into. You will have plenty of time for that once things have settled down and your mind has cleared. But these simple guidelines will help make the process easier for you to understand at the outset.

If you are a spouse inheriting an IRA, and …

– Your spouse died before taking Required Minimum Distributions (RMD): You can treat the IRA as your own.

– Your spouse died after starting RMDs and was older than you: You can treat the IRA as your own.

– Your spouse died after starting RMDs and was younger than you: You can treat the IRA as a Spousal Inherited IRA and take RMDs based on the spouse’s previous life expectancy.

If you are a non-spouse inheriting an IRA. and …

– The deceased died before taking RMDs: You can treat the IRA as an Inherited IRA and take annual distributions based on your life expectancy.

– The deceased died after taking RMDs: You still treat the IRA as an Inherited IRA and take annual distributions based on either your life expectancy or the deceased’s remaining life expectancy, whichever is longer.

If a trust is inheriting the IRA …

– RMD status doesn’t matter. IRA makes distributions annually based on the life expectancy of the oldest trust beneficiary.

Let’s say your spouse dies at 60 and you are 50 at the time. If you convert the IRA to your name through the spousal provision, you have to wait until you are 59½ to use any of that money without paying a 10 percent penalty. But if you leave the IRA as a “beneficiary IRA,” with your deceased spouse as the owner and you as the beneficiary, you can immediately pull money from that IRA penalty-free. In fact, you are required to take an RMD every year based on your life expectancy.

In this example, that would be about 3 percent in the first year. On a $300,000 IRA, that would be about $9,000 in the first year.

Have you recently been in this situation? What problems did you experience dealing with your late spouse’s investments?

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– Wes Moss, for AJC Atlanta Bargain Hunter blog

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