Page 5 - Belco_Connections_Winter-2017

based on the age of that IRA owner. 3
You can also “disclaim” some or all of any inherited IRA assets, which could be a
wise move for tax purposes if you don’t need the inherited funds. 4
Not realizing your four options when you inherit your spouse’s IRA. If a spouse
dies, the surviving spouse that inherits an IRA has some choices. He or she can
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There are compelling reasons to go with the rollover. The widowed spouse can set
up an RMD schedule based on his or her life expectancy. This second point is
really important, because the rollover allows the surviving spouse to
put off the RMDs that would otherwise soon need
to happen. In fact, the surviving spouse can wait
until the year in which the original IRA owner
would have turned 70½ to start taking
required withdrawals from the IRA. 2
If you inherit a Roth IRA from your
spouse, you may be able to roll the assets into
a Roth IRA of your own or treat the Roth
IRA you received from your spouse as your own
if you are the sole beneficiary. This is worth noting, as Roth IRA owners will never
have to make mandatory annual withdrawals from their IRAs. 4
Incidentally, there is no such thing as an early withdrawal penalty from an inherited
IRA. Inherited IRA withdrawals are never hit with the 10% early distribution penalty as
the funds are categorized as death proceeds. To certify this, the IRA custodian or trustee
needs to report these withdrawals as “death distributions” in Box 7 of Form 1099-R. 5
If the spouse converts the IRA into his or her own IRA, the surviving spouse can
name a beneficiary for the inherited assets, keep contributing to the IRA, and
potentially avoid RMDs until he or she turns 70½. 6
Alternately, a surviving spouse who doesn’t really need inherited IRA assets can
“disclaim” them, meaning that they will go to a contingent beneficiary. Sometimes
this can be a wise move for tax
purposes. 7
Non-spousal heirs fail to
retitle an inherited IRA. If
this isn’t done in the year following the year in which the
original IRA owner passed, then there can be no direct rollover
of the inherited IRA assets and no “stretch” for those assets. 2,8
What happens if a non-spouse beneficiary just rolls the
inherited IRA assets into an IRA they own, one that isn’t
retitled? Then it is not a direct rollover. The IRS treats those
(“IRA Missteps” continued on page 9)
4