Penalty-Free IRA Options for Young Widows/Widowers

How to Keep IRA Options Flexible and Penalty-Free for Young Widows and Widowers

Widows and Widowers whose spouses were younger than 70 at time of death need to examine their options carefully before rolling over their spouse’s IRA.

The typical route, and the default when a couple is close in age, is to take the IRA as their own, simply rolling the assets in the deceased spouse’s IRA into their own IRA. In this case they would begin to take annual required minimum distri­b­u­tions in the year in which they turned 70 ½ and could not access funds without the additional 10% early withdrawal penalty until after they reached 59 ½.  So it is ideal if you want to delay distri­b­u­tions, but a potential problem if you need to access the funds in the account prior to 59 ½. Any young widows and widowers may find it difficult to assess their future cash needs with any sense of accuracy.

Another route is to take the IRA as a Benefi­ciary IRA. With a Benefi­ciary IRA, widows and widowers may access the funds in the account at any time without penalty. Typically for Benefi­ciary IRAs, required minimum distri­b­u­tions must begin in the year after the death and are calcu­lated based on the beneficiary’s age. This is ideal to escape the early withdrawal penalty but a problem if you want to avoid unnec­essary distri­b­u­tions.

However there is an exception if the spouse is the sole benefi­ciary and the deceased was younger than 70 at the time of death.  In that circum­stance the surviving spouse can forgo required minimum distri­b­u­tions until the year in which the deceased turned 70 ½ but still access the account if needed without penalty when rolled into a Benefi­ciary IRA.

In addition, at any time they can roll the Benefi­ciary IRA into their own IRA. The ideal time to do this would be the earlier of them turning 59 ½, after which there is no early withdrawal penalty for withdrawals from their own account or prior to the year in which the deceased would have turned 70 ½. The account custodian should be able to accom­plish this transfer of assets from Benefi­ciary IRA to their own IRA with a simple letter of instruction if all condi­tions are met.  This will then delay required minimum distri­b­u­tions even longer, until the year in which the widow or widower turned 70 ½.