- If mandatory minimum distributions from an inherited IRA must be taken, widows and widowers can calculate them using their own life expectancies.
- Spousal beneficiaries can likewise use a five-year plan to empty an inherited IRA.
How do I deal with an IRA when my spouse dies?
Inherited from a previous marriage. If a traditional IRA is left to a surviving spouse, the surviving spouse usually has three options:
- By declaring himself or herself as the account owner, he or she might treat it as his or her own IRA.
- Treat it as if it were his or her own by rolling it over into a standard IRA or, if taxable, into a:
d. A state or local government’s deferred compensation plan (section 457(b) plan), or
3. Rather than considering the IRA as his or her own, regard himself or herself as the recipient.
Even if the surviving spouse is not the sole beneficiary of his or her deceased spouse’s IRA, a distribution from his or her deceased spouse’s IRA can be rolled over into the surviving spouse’s IRA within the 60-day time restriction, as long as the payout is not a mandatory distribution.
Someone other than the spouse inherited it. The beneficiary cannot treat an inherited conventional IRA as his or her own if it is not from a deceased spouse. This means the beneficiary is unable to contribute to the IRA or transfer funds into or out of the inherited IRA. The beneficiary, on the other hand, can make a trustee-to-trustee transfer if the IRA into which the funds are being transferred is established and maintained in the name of the deceased IRA owner for the beneficiary’s benefit.
The recipient, like the original owner, will not owe tax on the IRA’s assets until he or she receives distributions from it.
Does my spouse get my IRA if I die?
The majority of people designate their spouses to receive the cash in their retirement accounts after they pass away. Even if the spouse was not named as a beneficiary, he or she may be entitled to a portion of the money.
IRAs
The money in the deceased spouse’s traditional IRA or Roth IRA does not immediately pass to the surviving spouse (or registered domestic partner). The money will be available to claim if the account owner specified someone else as the beneficiary. However, there are several limitations to this right.
Community Property States
The money in a retirement account may be community property if the couple lived in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin). The couple owns the community property equally.
Although an IRA is an individual account, if the contributions were made with community propertyfor example, one spouse’s wagesall of the money in the account is community property unless the couple has agreed otherwise.
If the account is community property, the surviving spouse is entitled to half of it. It’s not an inheritance because the money has always belonged to the husband.
Other States
A surviving spouse is always entitled to anything from the estate of their deceased spouse. No married person can completely disinherit his or her spouse unless the spouse expresses his or her desire to inherit in writing.
Surviving spouses who are dissatisfied with their inheritance can take their case to court and seek whatever share of the deceased spouse’s property state law allows. The amount a survivor is entitled to claim varies greatly from state to state, and in some cases, it is determined by the length of the couple’s marriage. When assessing how much the survivor might claim, the law may take IRA funds into account.
(k) and other Qualified Plans
“Qualified” retirement plans are those set up for employees that comply with IRS standards in order to qualify for federal tax benefits. Employees finance 401(k) and 403(b) plans with deferred salary, and these are the most prevalent instances.
Unless the surviving spouse signs a waiver giving up his or her rights and enabling the other spouse to select a different beneficiary, these arrangements offer the surviving spouse the right to inherit all of the money in the account. When an employee enrolls in a qualified retirement plan, the institution that administers the plan normally provides a waiver form.
The waiver had to be signed by the survivor while the couple was still married. So, if the pair signed a prenuptial agreement before getting married, and one or both of them agreed to relinquish rights to the other’s qualified retirement plan account, it won’t be considered a legitimate waiver.
Can I cash out my deceased husband’s IRA?
- Transfer the funds to your own traditional or Roth IRA, whether it’s an existing account or one you’re starting now.
- Allow the money to pass to the contingent (alternative) beneficiary by refusing to accept it.
To exercise any of these choices, contact the firm that administers the account. It will come with its own set of documents for you to fill out.
Withdrawing the Money Now
Even if you’re under the age of 59 1/2, when penalty-free withdrawals are usually allowed, you can withdraw money from an inherited account without incurring a penalty. However, you will be required to pay income tax on the amount you withdraw.
Rolling Over the Account Into Your Own IRA
Survivor spouses are the only ones who can roll over inherited assets into their own IRAs. Though you do this, the funds will be treated as if they were from your own IRA. You can contribute to the account, and the withdrawal rules are the same as if the account had been opened in your name. You must roll over a traditional IRA, SEP-IRA, or 401(k) into a traditional IRA if you inherit one; if your spouse nominated you as the beneficiary of a Roth IRA, you can roll it over into your own Roth IRA.
Traditional IRA
The biggest advantage of rolling over a traditional IRA is that your required minimum distribution (RMD)the amount you must withdraw each year after you turn 72is calculated based on your age. Rolling over the account to your personal IRA if you were younger than your spouse affords you the benefit of greater tax-deferred growth. If your spouse is over 72 and has already begun taking distributions, but you are under 72, you will not be forced to begin taking distributions. Even if you’re over 72, your RMD would be lower if you were younger than your spouse, because the amount is calculated based on your statistical life expectancy.
If you’re under the age of 59 1/2 and think you’ll need money, don’t roll over your account. Because a rolled over account is viewed the same as if it were your own, you’ll be hit with a 10% early withdrawal penalty if you take money out before you’re 59 1/2. This penalty would not apply if you converted the IRA to a “inherited IRA” (see below).
Roth IRA
If you are eligible under tax rules, you can roll over your spouse’s Roth IRA into your own Roth IRA and continue to make contributions. With Roth IRAs, there are no required minimum distributions, so you don’t have to worry about that.
Withdrawals from a Roth IRA are generally not subject to income tax. (This is because, unlike most regular IRA donations, the contributions to the account were made with after-tax monies.) You’ll have to pay an early withdrawal penalty if you remove money from a Roth IRA that hasn’t been open for at least five years.
Opening an Inherited IRA
You can create a “inherited IRA” by converting an existing IRA or 401(k) account. If you’re under the age of 59 1/2 and want to access your money without incurring an early withdrawal penalty, this could be a good option.
It’s possible that you’ll have to take necessary minimum distributions each year. Your RMD will be calculated based on your statistical life expectancy. You must begin taking RMDs at the end of the calendar year after your spouse’s death if he or she was over 72 at the time of death. If your spouse was younger than 72, you might be eligible to postpone making withdrawals until he or she reached that age. (If you’re older than your spouse, this can be favorable.)
(Note: If your spouse dies before 2020, the eligible age for RMDs to begin is 70 1/2, not 72, because new legislation passed in 2020 does not apply retrospectively.)
It’s critical not to take money out of an inherited IRA account if you wish to start one. The transfer, known as a “trustee to trustee” transfer, must be done straight from the old account to the new one. You might owe income tax on the money if you don’t.
Disclaiming the Money
You don’t have to accept the money if you don’t need it and would rather it go to the dependent (alternative) beneficiary your spouse named. This is referred to as “disclaiming” the funds. You must disclaim the funds within nine months of your spouse’s death and before taking control of the funds. If you change your mind after disclaiming, you won’t be able to get your money back.
Why would you refuse money? From a tax aspect, it may make sense in some family situations. (If the beneficiary is in a lower tax bracket than you, for example, the taxes on distributions will be lower.) However, most non-spouse beneficiaries must exhaust the whole value of the retirement account within 10 years under the requirements of the SECURE Act, which went into force in 2020. Only a few exceptions apply:
- a young child (but once the child is no longer a minor, the 10-year rule applies)
- a person who is disabled or chronically ill (according to the IRS definition), and
Getting Expert Advice
The laws regulating the inheritance of tax-advantaged retirement assets are obviously complicatedand they change frequently. Consult someone who has experience moving retirement funds before taking any action, especially before touching the money in a retirement account you’ve inherited. Most plan administrators have specifically trained advisers who can walk you through your options; speaking with them is an excellent place to start.
What happens to money in an IRA when someone dies?
Individual retirement accounts were intended to provide investment vehicles for individuals so that they could access their savings after they ceased working to cover costs. Individual Retirement Accounts (IRAs) can be employer-sponsored, as in a 401(k) plan, or they can be self-directed (IRAs).
These accounts are subject to a slew of Internal Revenue Service (IRS) regulations, including limits on annual contributions, fines for early withdrawals, and mandated distribution amounts based on the account holder’s age and life expectancy.
When a retirement account owner passes away, the account might be left to a beneficiary. Any person or entity chosen by the owner to receive the funds might be a beneficiary. If no beneficiary is named before the account is opened, the account is usually given to the estate.
The amount of flexibility a recipient has in terms of what can be done with an inherited retirement account, as well as the tax implications of the bequest, is determined by a variety of circumstances. The IRS has a wide range of rules and options depending on the type of IRA (traditional or Roth), whether a beneficiary was named, whether the account holder died before or after the start of “required minimum distributions” (RMDs), and whether the account’s sole beneficiary is a surviving spouse or widow.
Understanding the complexities of options available to a retirement account recipient is critical to meeting IRS requirements and maximizing the financial benefits of any inherited funds. Before taking any action affecting retirement accounts, owners and potential beneficiaries should get expert counsel.
What is an inherited spousal IRA?
A surviving spouse beneficiary can treat all or part of their deceased spouse’s IRA as their own, or they can treat it as an inherited IRA, as other beneficiaries must. The surviving spouse can name his or her own beneficiaries by claiming the IRA as his or her own. If the account owner is concerned about this, there are various solutions to examine and weigh against the expenses of implementation and tax implications, as discussed below.
Is my spouse a beneficiary?
When most people hear the words “estate planning,” they immediately think of wills and trusts. However, setting beneficiary designations and maintaining them up to date after life changes is an important and frequently forgotten element of estate planning. As more people put money into retirement accounts like 401(k)s and individual retirement accounts (IRAs), it’s more critical than ever to make sure that the assets in those accounts are dispersed to the correct people.
401(k)s and IRAs account for almost 60% of the assets of U.S. households investing at least $100,000, according to the Wall Street Journal. State and federal rules have an impact on who gets these assets, and the outcomes can be convoluted, especially if the account owner is divorced and remarried. As a result, an expert estate planning attorney’s advice is vital in assisting people in making the proper beneficiary designations.
Most pensions and retirement accounts are governed by the Employee Retirement Income Security Act (ERISA), a federal legislation. If the owner of a retirement account is married when he or she dies, regardless of the beneficiary arrangement, his or her spouse is automatically entitled to receive half of the money.
If the intended beneficiary is someone other than the spouse, the spouse will receive half of the assets and the designated beneficiary will receive the other half. Unless he or she has completed a Spousal Waiver and another person or entity (such as an estate or trust) is specified as a beneficiary, a spouse always receives half of the assets of an ERISA-governed account.
By correctly completing a Spousal Waiver, a spouse can forego his or her claim to 50% of the account. However, depending on the type of retirement plan, a Spousal Waiver is generally not permitted under ERISA unless the spouse is at least 35 years old.
When the owner of a retirement account remarries, these rules can cause issues. Frequently, after a divorce, the owner will change his or her beneficiary designation and name the children as the intended beneficiaries. Even if the new spouse is not named as a beneficiary, if the owner later remarries, 50 percent of the retirement assets will go to the new spouse instead of the children.
If a 401(k) owner is single when he or she dies, the assets go to the specified beneficiary, regardless of what the owner’s will says. Furthermore, independent of any other agreements including court decisions the assets will be given to the selected recipient.
Assume a man’s 401(k) plan’s chosen beneficiary is his wife (k). The couple divorces, and the man keeps his beneficiary designation the same, but the woman waives her claim to any retirement assets as part of the divorce settlement. Even if the divorce orders state that his former wife should not receive the retirement assets if he dies without changing his beneficiary designation or remarrying, his former wife will still obtain the retirement assets if he dies without changing his beneficiary designation or remarrying.
IRAs, unlike 401(k)s, are governed by state law, which does not automatically make spouses beneficiaries. By converting a 401(k) to an IRA, an owner can identify anyone as the chosen beneficiary, with or without the approval of their spouse. Spouses do not have ERISA rights with IRAs, according to federal courts.
These instances highlight the need of carefully drafting and amending beneficiary designations to ensure that they reflect the owner’s desires for distribution after death. If you’re married and don’t want your spouse to receive at least half of your retirement assets, consider signing a Spousal Waiver and making sure you’ve chosen alternative beneficiaries for your retirement funds. If your ex-spouse relinquished any claim to retirement funds during the divorce, make sure your beneficiary designation form reflects this. Finally, converting a 401(k) to an IRA gives chosen beneficiaries greater options.
How many years do you have to be married to get your spouse’s 401k?
To be eligible for a spouse benefit, you must have been married to the retired or disabled worker whose earnings record you are claiming benefits for at least one year.
The one-year rule has a few small exceptions. For example, you can receive benefits on the record of a new spouse if you were already receiving or meeting the requirements for benefits as a spouse (of someone else), divorced spouse, surviving spouse, surviving divorced spouse, parent, or disabled adult child in the month before you married that person.
Keep in mind
- In most situations, you must be at least 62 years old to get a spouse benefit, but you may be eligible if you are younger and caring for a child under the age of 16 or disabled and your spouse is qualified for family benefits.
- The maximum spouse benefit is equal to half of your spouse’s total retirement payout. If you claim the spouse benefit at full retirement age, you’ll get it (currently 66 and 2 months and gradually rising over the next several years to 67). Benefits for spouses are lowered if they are claimed early.
Does IRA go through probate?
Traditional IRAs are governed by a complex set of rules. Six key differences exist between IRAs and other financial assets:
Regardless of what you specify in your will or living trust, your IRA account has a beneficiary who will receive your IRA upon your death.
In states where probate is difficult, this can save a lot of time and money.
Any IRA distributions are taxed as ordinary income, not at the lower capital gains rates.
When a person dies, most of their other assets incur a step-up in cost basis, wiping out all capital gains on those assets up to that point in time. IRAs, on the other hand, are a different story. The beneficiary of your IRA will pay regular income tax at his or her rate on any distributions.
You must first take a distribution, pay the income tax and any relevant penalties, and then make the gift if you want to contribute portion of your IRA to an individual or organization. For persons over the age of 701/2 who give $100,000 or less to a qualifying charity, there is an exception called the Qualified Charitable Distribution (QCD). If all of the QCD’s criteria are met, the distribution is deducted from your taxable income.
- The only asset in your estate subject to Required Minimum Distributions is a traditional IRA (RMDs).
When you die away, RMDs apply to both you and your beneficiary. The regulations for RMDs are particularly complex, and depend on whether the beneficiary is your spouse, your age difference (if the beneficiary is your spouse), and whether you had started taking your RMD before your passing. While the IRS is fine with you having deferred growth in your IRA for many years, you must withdraw a portion of your IRA and pay ordinary income tax on it in the year you turn 72 (70 1/2 if you turned 72 before January 1, 2020). These RMDs will be renewed every year after that.
How long does a spouse get survivors benefits?
Survivor payments may be paid to a person’s spouses, previous spouses, children, and parents if they qualified for or were receiving Social Security benefits at the time of death. The length of survivor benefits varies depending on who receives them.
Widows and widowers
The majority of survivor benefit recipients 65 percent as of September 2021 are deceased workers’ older surviving spouses or surviving divorced spouses. Spouses and ex-spouses are generally entitled for survivor payments at the age of 60 or 50 if handicapped if they do not remarry before that age.
Unless the spouse begins to receive a retirement benefit that is greater than the survivor benefit, these benefits remain payable for life. The bigger of the two sums is paid to beneficiaries who are eligible for two types of Social Security payments.
Mothers and fathers
If they are caring for children or dependent grandchildren of a deceased worker who are younger than 16 or disabled, Social Security can pay “mother’s or father’s insurance payments” to surviving spouses and ex-spouses of any age.
- There is no longer a child under the age of 16 or a disabled youngster in their care who is entitled to benefits based on the late worker’s earnings record.
- Remarries. If the marriage is to someone who receives certain types of Social Security payments, there are some exclusions.
Children
Benefits for surviving children usually end when a kid reaches the age of 18. If the child is a full-time student in elementary or secondary school, benefits can be continued until the age of 19 and 2 months, or benefits can be continued indefinitely if the child is disabled before the age of 22.
Getting married will nearly always terminate a recipient child’s survival benefits, even if the youngster still qualifies due to age or handicap.
Surviving stepchildren, grandkids, step-grandchildren, and adopted children may also be eligible for survivor benefits, as long as they follow the conditions outlined above.
Parents
If the worker’s parents are 62 or older and the worker provided at least half of their support, they may be eligible for survivor payments, either individually or as a pair. These benefits are payable for life, much as widows and widowers, unless the parent remarries or starts collecting a retirement benefit that exceeds the survivor benefit.
- Remarrying after the age of 60 (or 50 if handicapped) has no bearing on widow or widower benefits.
- Benefits for Survivors If the later marriage ends in death, divorce, or annulment, the benefits you lost as a result of remarrying before that age can be returned.
What is the difference between survivor benefits and widow benefits?
Survivor benefits, unlike spousal benefits, are not capped at 50% of your spouse’s benefit amount. If you’ve achieved full retirement age and are widowed, you’re eligible to receive the full amount of your late spouse’s benefit. It’s the same if you’re divorced and your ex-spouse has passed away.
Does an IRA get a step up in basis at death?
“What do I do with the IRA in the estate?” an executor will question us several times a year. The IRA is often one of the estate’s most valuable assets, but the decedent may have considered his or her estate plan was complete once the will and trust documents were signed. Many well-intentioned settlors are unaware that IRAs are frequently distinct from other assets in their estate and may be exempt from their will or trust.
- An IRA beneficiary is usually not controlled by a will. The IRA account has its own designation of beneficiary form, which regulates who receives the IRA at death, regardless of what the will indicates. If the IRA’s intended beneficiary is the estate, which is normally not recommended, a will governs who receives the IRA.
- At death, IRAs do not get a step-up in basis. At the time of death, most assets held by the deceased receive a “step-up” in basis, which usually eliminates any gain that would otherwise be recorded. The owner’s basis is passed down to the IRA beneficiary without any basis adjustments.
- Ordinary income is taxed on IRAs. The sale of shares and the receipt of dividends are usually considered capital gains and are taxed at a lower rate. Any distributions from an IRA are taxed at ordinary income tax rates rather than capital gains rates.
- An IRA can’t be given away. You can’t give your beneficiaries all or part of your IRA before you die. To give the funds, you’d have to take a distribution and gift the proceeds to the beneficiaries, which would be taxed. Over 70-and-a-half-year-olds have an exception: they can give up to $100,000 to a recognized charity each year without having to report the donation as income.
- Required minimum distributions may apply to IRAs (RMDs). During the estate administration process, this is an aspect that is frequently forgotten. If the deceased was over the age of 70 and a half, they were compelled by law to take RMDs, which are the minimum amounts they must get from their IRA. Many executors overlook the fact that RMDs are required even after the death of the decedent. RMD requirements are complicated and change depending on who the beneficiaries are and their ages, so hiring a knowledgeable counsel is essential.
IRAs can be a pain for estate administrators, simply because the dead did not grasp the importance of properly planning for the transfer of the IRA account. While an IRA is not subject to probate, there are numerous other pitfalls for the unwary that much outweigh this minor advantage. Contact John Ure or one of our other experienced estate tax experts at 301.231.6200 if you or someone you know is planning for or trying to administer an estate containing an IRA.