Q: I am a 43 year old housewife. I have never worked outside the home. My husband passed away recently, and I'm the beneficiary of his 401(k). It's worth approximately $105,000. What should I do with it? It's currently invested at T. Rowe Price. Should I leave it there or transfer it to a bank? Should I roll it over into a new IRA in my name, or transfer it to an inherited IRA? --CO via email
A: The best choice depends partly on your financial situation. Do you have other sources of money, or are you likely to have to draw on this retirement account for your current needs?
Ideally, you want to leave a retirement account untouched for as long as possible. If you roll it into an IRA in your own name, you won't have to take withdrawals until after you're 70 and a half. But if you're likely to need this account for near term expenses, you should keep at least a portion of it as an inherited IRA.
Here's why:
No matter which option you take, all your withdrawals from the IRA will be taxable income. But if you maintain it as an inherited IRA, you're allowed to take withdrawals without triggering a 10% early withdrawal penalty regardless of your age.
By contrast, if you roll it into an IRA your own name, you become the account's owner instead of its beneficiary. Any withdrawals you take before age 59 and a half will be subject to a 10% early withdrawal penalty as well as to income taxes.
If you have kids, you will be able to name a conduit trust for them as the successor beneficiary to an inherited IRA, says Barry C. Picker, a Brooklyn NY tax accountant and IRA expert.
If you die before December 31 of the year in which your late husband would have turned 70 and a half, the kids will be able to empty the account over their own life expectancies. (Before that time comes, Picker says, you should move the inherited IRA into an IRA in your own name so that they don't lose that advantage.)
It's worth noting that you have some of these options because you're a surviving spouse. When you inherit an IRA from someone who was not your spouse, your successor beneficiary doesn't get to stretch account withdrawals over his or her own life expectancy.
A conduit trust will preserve the inherited IRA's tax advantages for the kids while they're minors. Another advantage of a trust is that you can pick the age at which the children gain control of the account. (You might decide that a 25 year-old is better able to handle a sizable inheritance than an 18 year-old, for example.)
Once the kids are adults, you can name them directly as the IRA beneficiaries.
If you keep the account as an inherited IRA, you won't have to take required IRA distributions until the year your late husband would have been 70 and a half, says Picker -- but any withdrawals you do take will escape the early withdrawal penalty.
As for your investment management question, I think you should keep the money at T. Rowe Price, rather than transfer it to a bank. T. Rowe Price is a major no-load mutual fund company that offers an excellent selection of low-cost investments -- a much broader selection than you'd find at any bank. Besides, this isn't an irrevocable decision. You can decide to move the IRA at a future date if you want.
A: The best choice depends partly on your financial situation. Do you have other sources of money, or are you likely to have to draw on this retirement account for your current needs?
Ideally, you want to leave a retirement account untouched for as long as possible. If you roll it into an IRA in your own name, you won't have to take withdrawals until after you're 70 and a half. But if you're likely to need this account for near term expenses, you should keep at least a portion of it as an inherited IRA.
Here's why:
No matter which option you take, all your withdrawals from the IRA will be taxable income. But if you maintain it as an inherited IRA, you're allowed to take withdrawals without triggering a 10% early withdrawal penalty regardless of your age.
By contrast, if you roll it into an IRA your own name, you become the account's owner instead of its beneficiary. Any withdrawals you take before age 59 and a half will be subject to a 10% early withdrawal penalty as well as to income taxes.
If you have kids, you will be able to name a conduit trust for them as the successor beneficiary to an inherited IRA, says Barry C. Picker, a Brooklyn NY tax accountant and IRA expert.
If you die before December 31 of the year in which your late husband would have turned 70 and a half, the kids will be able to empty the account over their own life expectancies. (Before that time comes, Picker says, you should move the inherited IRA into an IRA in your own name so that they don't lose that advantage.)
It's worth noting that you have some of these options because you're a surviving spouse. When you inherit an IRA from someone who was not your spouse, your successor beneficiary doesn't get to stretch account withdrawals over his or her own life expectancy.
A conduit trust will preserve the inherited IRA's tax advantages for the kids while they're minors. Another advantage of a trust is that you can pick the age at which the children gain control of the account. (You might decide that a 25 year-old is better able to handle a sizable inheritance than an 18 year-old, for example.)
Once the kids are adults, you can name them directly as the IRA beneficiaries.
If you keep the account as an inherited IRA, you won't have to take required IRA distributions until the year your late husband would have been 70 and a half, says Picker -- but any withdrawals you do take will escape the early withdrawal penalty.
As for your investment management question, I think you should keep the money at T. Rowe Price, rather than transfer it to a bank. T. Rowe Price is a major no-load mutual fund company that offers an excellent selection of low-cost investments -- a much broader selection than you'd find at any bank. Besides, this isn't an irrevocable decision. You can decide to move the IRA at a future date if you want.
Note to readers: This post originally contained errors which I've corrected.
(c) Lynn Brenner, All Rights Reserved
Lynn,
We love your column...
I am a CFP in the midwest and a certain large unnamed mutual fund company is telling a client to move her deceased husband's account into an inherited IRA, and then if she would like to, she can move it into her IRA down the road. Her husband was 62. She is 57 and has more than enough money to carry her to age 59 1/2. But the real question is can a client move an inherited/beneficiary IRA from their spouse back into an IRA in their own name down the road -- or is this decision irrevocable?
Thanks
Mike
Posted by: Mike | 12/14/2009 at 02:27 PM
Lynn replies: That's a great question, Mike. I think that you do retain the option to move an IRA that you inherited from your spouse into an account in your own name at a future date. But I'm not sure. I'll double-check and do a new post on it.
Posted by: lynn brenner | 12/15/2009 at 10:40 AM