Designating a spouse as a beneficiary of an IRA not only ensures they will have access to retirement accounts in the event their partner passes away, but it offers them unique advantages to which non-spouse beneficiaries are not entitled.
If a spouse is the named beneficiary of an IRA, they have several distribution advantages:
- Spousal rollover. Rolling over an inherited IRA into the surviving spouse’s retirement account allows them to treat the inherited account as their own. This allows the money to remain in a tax-advantaged account longer. (There is also the option of transferring assets into an inherited IRA. If a surviving spouse is under age 59 ½, this would allow penalty-free withdrawals. Check with a North Carolina estate planning attorney to learn how these rollovers can be structured.)
- Remaining a beneficiary. A surviving spouse does not need to rollover an IRA into their own. Instead, they may choose to “remain a beneficiary” in order to delay the required date for distributions. Choosing this option allows the surviving spouse to delay distribution up until December 31st of the year the decedent would have reach 70 ½ years old. This would only be advantageous if the surviving spouse is significantly older than the account owner. (For non-spouse beneficiaries, part of Obama’s 2013 budget proposal includes a revision that would require IRAs to be distributed over five years instead of over the lifetime of the beneficiary.)
- Naming new beneficiaries. Surviving spouses can name new beneficiaries if they choose to rollover the IRA into their own. This also allows the retirement money to last longer since money remaining when they pass will continue to compound tax-deferred for their designated beneficiaries, as beneficiaries they are allowed to stretch distributions over their life expectancies.
Make sure beneficiary designation forms are up-to-date on both spouses’ IRA accounts. Making a decision on how to manage an inherited IRA should be made after consulting a North Carolina estate planning attorney. The beneficiary’s needs must be addressed, but at the same time distribution and federal and state tax requirements must be evaluated. In addition, such as in second marriages, it sometimes makes sense to leave an IRA in a trust for a surviving spouse to ensure it is protected for young generations.
CATEGORIES: Estate Planning, Financial Planning, IRAs, Retirement, Tax