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I sat down with
IRA
expert Ed Slott to discuss key
challenges with
IRA
s and inheritance.
Benz:
What do you do when you inherit an
IRA
? And
there are some important distinctions depending on
your relationship to the deceased. Let’s start with the
spouse beneficiary. Let’s talk about what options they
confront when they inherit an
IRA
from their spouse.
Slott
:
As an inheritor, I always start with two words,
no matter who the inheritor of an
IRA
is. Two words:
Touch nothing.
Benz:
So, go get some advice.
Slott:
That will save you a fortune. [Wait] until you
are with somebody who knows how to set up
IRA
s,
knows how to set up inherited
IRA
s, knows the differ-
ence between beneficiaries. Again, you need some-
body with specialized knowledge in this. I’ll give you
an example. The average beneficiary, let’s say, is
a son or a daughter and they’re not children, they are
maybe in their
50
s already. The first thing they might
do [is say,] “Oh, here is Mom’s
$500
,
000
IRA
—let’s
take it out.” Well, that’s the end of that. The minute
you touch an inherited
IRA
, it’s over. The minute it
comes out, it’s taxable. And that is the number-one
mistake, grabbing it too fast. It’s taxable, and there is
no fix. That’s an irrevocable—or what I’d call fatal—
error. So, first thing, take a breath. You can look at it
on the statement, but don’t touch it.
Now, to your question if the spouse is the beneficiary.
If they are under
59
1
/
2
, they should maintain it as an
inherited
IRA
—only a spouse has that option. The
spouse can also do a rollover. Most people, including
myself, will recommend the spousal rollover, but
only if the spouse is
59
1
/
2
or older. If the spouse is
younger than
59
1
/
2
, it’s more likely that the spouse
may need to dip into that money. And if he or she
does, of course, they will pay the tax—that’s not
what we are talking about—but they will also pay a
penalty, because once they do a rollover, it’s treated
as if it was always their money, and they are subject
to the
10%
early withdrawal penalty.
If they elect to stay as a beneficiary, there is no
10%
penalty. If they need money before
59
1
/
2
, they can
just take that money. They will pay the tax, but no
10%
penalty. Then, at
59
1
/
2
, when the penalty period
expires, he or she can do the rollover into their own
IRA
, and they don’t have to take required distributions
until they turn
70
1
/
2
.
Another important thing for any beneficiary, but espe-
cially a spouse: As soon as you inherit, set up the
right type of account. Again, if you are under
59
1
/
2
,
an inherited account;
59
1
/
2
or over, a spousal roll-
over. But immediately name new beneficiaries on your
own
IRA
.
Benz:
Why is that so important to make sure that you
are naming those beneficiaries?
Slott:
Number one, you direct where that money will
go after you die, and [number two], preserve the
stretch
IRA
for your chosen beneficiaries. Otherwise,
if you don’t name beneficiaries, it may end up back
in your estate, or it could be contested. Who knows
where it might end up?
Benz:
If your heirs are younger, they have the opportu-
nity to stretch those distributions.
Slott:
In certain cases. If you do a spousal rollover,
then it’s yours. And you should name both primary
and contingent beneficiaries. If they are named on the
IRA
beneficiary form, they can stretch. If you keep
it as an inherited
IRA
, you still want to name benefi-
ciaries. They would be, in that case, successor
beneficiaries—in effect, the beneficiary’s beneficiary.
Benz:
Does it matter if the deceased had begun
taking distributions and was required to take required
minimum distributions from that
IRA
?
IRA Challenges and Inheritance
Portfolio Matters
|
Christine Benz