Should I Inherit My Deceased Spouse’s Traditional IRA?

There are a few options a client can consider when they inherit an IRA from their spouse. The best option for our clients will depend upon a variety of factors, and the relevant rules and decision points can be confusing.

Common issues that arise when a client inherits a traditional IRA from a spouse:

• Inheriting the IRA vs. rolling the IRA into the client’s own traditional IRA

• 10-Year Rule vs. Life Expectancy Rule

• RMD calculations

• Considerations based on age and income needs

Transcript:

Hi, Todd Pouliot, Gateway Financial, www.mygatewaymoney.com. Again, thank you so much for your thumbs up we really appreciate that. And, the subscribers, we appreciate you sharing our content. And, we often have to do videos about things we don't like to talk about and today is one. We’ve recently had a situation, and you know, we have to talk about these things because it's our job and you know it's not fun to have these conversations. But, figuring out financial planning for our clients is certainly important because it takes one less thing off a surviving spouse’s shoulders. So, when we want to talk about this, we want to talk about the options that an inherited IRA has for a spouse. So, we created this flowchart, “Should I Inherit My Deceased Spouse's Traditional IRA?” We're going to address some of the common issues. There's a variety of factors, and relevant rules that we need to discuss, and they can be extremely confusing. Mind you, the rules have changed recently, so we want to make sure we're updated on these rules and we're going to talk about four main areas for you today as our next potential client. Inheriting the IRA versus rolling the IRA into the client’s own traditional IRA. A 10-year rule versus a life expectancy rule. RMD calculations, again that required minimum distribution. And, considerations based on age and income needs. And, as we always do, we're going to be open with you and be very free to share our content and hopefully, you’ll come in and talk to us about these things. And, we can talk about, “Should I Inherit My Deceased Spouse's Traditional IRA?” Are you the sole beneficiary of your spouse's traditional IRA? I want to stop here because we always say these are logic questions, yes or no, and we follow the path. We want to make sure that you are the sole beneficiary. Traditionally because of the way the rules and the laws are written, you should be. Some spouses disinherit the IRA beneficiary claim. We want to make sure that we answer this question correctly before we move on to anything else, very imperative. Yes, did your spouse pass away before their RBD, required beginning date? No. So, we're going to move down. Did your spouse satisfy the RMD requirement for the current year? No. You must take the remaining RMD this year. So, we want to make sure that those are the things that we want to talk about very easy very quickly and get them taken care of before anything happens. So, understanding the date of death and the age of your spouse on that date is also important. Do you want income from this account? Yes. Are you younger than age 59 and a half? Yes. Consider inheriting the IRA, as distributions from an inherited IRA are never subject to a penalty. This is one of the major things that people come to us. They've recently lost their spouse and along with that spouse that they've lost, they may have lost some income. So, consider inheriting the IRA as distributions from the inherited IRA are never subject to a penalty. That is a critical step for some people, because you may not have kids under 18 for child benefits or other benefits that you may need. This is a big one if you're still looking for that income. Do you want income from the account? No. Are you older than your spouse? Yes. Consider inheriting the IRA if you're older than your spouse. If not, we're going to come all the way back here. Consider rolling over the IRA into your own IRA because the RMD will be less than if you inherited the IRA. Those are very different situations there. So, make sure you follow this workflow here very easily. So, if you're back here, did your spouse pass away before the required beginning date? Yes. Which best describes your situation? You want income in our younger than 59, or you don't want income and are younger than your spouse. Consider inheriting the IRA as distributions are never subject to a penalty. You are an eligible designated beneficiary. Accordingly, your RMD is based on your life expectancy using the single life table and must begin on the later of the year your spouse passed away or the year your spouse would have turned 72. Again, we have updated, this post the SECURE Act that was in 2020. We want to make sure that we're using the 72 and obviously, if you're reading this you're probably too far past, or watching this you're too far past. But, we want to make sure that you're utilizing, “you are a designated beneficiary” in this chart here. You don't want the income. Consider rolling over the IRA into your own IRA because the RMD will be less than if you inherited the IRA. Your RMD is based on your life expectancy utilizing the table at that time. Now mind you, these tables change all the time with the IRS, so understanding what those tables are. You know, that might not be something our clients do. I hope they don't spend their time figuring that out, but that’s something we do and we can take care of for you. So again, once you've done these decisions you can always roll this account into your own IRA at a later point. Don't think, “I've made a critical decision, I've done this and I can't do anything because I’ve backed myself into a corner.” We can always change it at a later time. Down here about inheriting the IRA. This option may make sense, but tailored planning must occur based upon your situation. And your RMD is based upon the longer of your life expectancy of your spouse’s life expectancy using again, that single life table. Boy, what a strenuous decision to make while you're grieving. Make sure you have a really good financial planner sitting next to you and helping you with all these situations. These can be daunting, absolutely daunting things to take on. Now, normally what I tell people when their spouse passes away, take your time, go through the grieving process, and be with their family and their loved ones and their friends because their waves of energy are going to go up and down through this time. These are not decisions that need to be done within the week. Go ahead and go through that grieving process, and as you start coming out of that grieving process work through all those financial things that you need to work through. All that checklist of things that need to happen. It does not need to happen within the first 30 days. Sit down, find a really good financial planner that will sit beside you and work through flowcharts like these and say, “Hey, here are my options and which options are best for me.” “Here's all the things that we know today.” And, plan for a good future and how that's going to impact your plan. So, thanks for being here on this difficult flowchart. But, we want to make sure we go through these flow charts and figure out what the plan is. Thumbs-up, we appreciate you guys subscribing to our channel, that really helps with the algorithm. And, we look forward to you being here and making these suggestions on these flow charts and checklists, and thank you, and have a good day.