Q: I am a Certified Financial Planner in the Midwest. One of my clients has inherited her late husband's IRA. A certain large mutual fund company has told her to move her deceased husband's IRA into an inherited/beneficiary IRA. She's been told that later on, if she wants to, she can later move it into an IRA in her own name. He was 62 when he died. She is 57 years old, and has more than enough money to carry her to age 59 1/2.
But the real question is, can you move an inherited/beneficiary IRA from your spouse into an IRA in your own name down the road -- or is the decision to keep it as a beneficiary IRA irrevocable? -- MA via email
A: Some IRA decisions are indeed irrevocable, but not this one. Your client won't lose her option to transfer her late husband's account into a new IRA in her own name at a future date.
For readers who don't know, when you inherit an IRA from your husband or wife, you have a choice: You can keep the IRA in its original owner's name, and continue to be the beneficiary. Or you can transfer it into a new IRA in your own name, and become the new owner.
What if Mary decides to keep the IRA in John's name? Then as the beneficiary, she must start taking distributions from the account by December 31 of the year John would have turned 70 and a half, or by December 31 of the year after his death, whichever comes later.
If she transfers it into an IRA in her own name instead, she won't have to take distributions until after she herself turns 70 and a half. But if she does take a distribution before she turns 59 and a half, she'll owe a 10% early withdrawal penalty on the amount she withdraws.
In your client's case, if she keeps the IRA as a beneficiary account, she doesn't have to take any distributions for another eight years, since her husband was 62 when he died. But if she does take one -- she has plenty of money, but who knows what unexpected need might arise -- she won't owe an early withdrawal penalty on it. There are no early withdrawal penalties on a beneficiary IRA.
Your client will be able to move the beneficiary IRA into an IRA in her own name later on, says Barry C. Picker, a Brooklyn, N.Y tax accountant and IRA expert. Indded, she should do that before the eight years are up, or she'll have to take annual distributions whether or not she needs them.
But in the meantime, he adds, she must be sure to name a successor beneficiary on her beneficiary account. Let's say her son -- we'll call him Kevin -- is the successor. If Mary is hit by a truck at age 63, her successor Kevin will be able to empty the IRA over his own life expectancy. **
If she doesn't named a successor beneficiary, and dies before she transfers the beneficiary IRA into an IRA in her own name, the account will have to be paid out within five years of her death, says Picker.
**An earlier version of this post incorrectly said Kevin would have to empty the IRA over Mary's remaining life expectancy. If you want to know the details, please email me. If not, be thankful that you don't need to know anything more about these arcane rules!
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