April 26, 2018

WTOP Interview: 5 Facts Widows Need to Know About Inheriting Traditional IRAs From Their Spouse

LISTEN NOW! 5 facts a widowed spouse can take when it comes to inheriting traditional IRA assets as a direct beneficiary
Dawn Doebler, MBA, CPA, CFP®, CDFA®, Senior Wealth Advisor

Interview Transcript:

Shawn Anderson: It's 5:11. There are many financial decisions that a widow or widower would have to face in the early days after the loss of a spouse. One of them, is deciding how to handle IRA accounts that were passed on to them from their spouse. Well these accounts come with complicated rules, making an uninformed decision could result in having less money to live on now or when you retire.

Hillary Howard: Joining us live to talk about what to do, Dawn Doebler co-founder of Her Wealth and Senior Advisor at The Colony Group in Bethesda, great to see you Dawn.

Dawn Doebler: Good to see you.

Hillary: So, if someone is widowed and gets an IRA from their spouse, what options do they have?

Dawn: Well, widows often have many legal and tax issues to handle and what often happens is, they’ll receive a letter from the company that holds an IRA for the deceased spouse and they have to make a quick decision. So, we have an article that outlines five different options that they have:

  1. The first one is, to roll over assets into an IRA in their own name, [only spouses can do that]. 
  2. Or rollover assets into an inherited IRA account, they can take the assets out and spend the money. We’ll talk about why that may not be a very good idea.
  3. You can convert the assets to a Roth IRA and that does require some more analysis, so you really should do that only after you speak with the CPA.
  4. And there is a fifth option, which is called “disclaiming assets” and that can apply if you think your estate might exceed the Federal estate exemption limit for married couples, which is about $11.2 millions in 2018.

Shawn: Age is a big consideration here, how does a widow's age affect what option that person would choose?

Dawn: Well, that's right Shawn. Your age influences the decision, primarily due to tax law and the number one takeaway here is that fifty nine and a half is the magic age and I will explain that in a minute. But first I want to say, that no matter what your age is, if you don't roll over assets but instead take them and spend the money, you'll pay ordinary income tax on the withdrawal. And what often gets missed is that this kind of withdrawal can have an impact on your tax bracket, in other words a big IRA distribution could move you into a higher tax bracket and you'll pay more out in taxes and you'll have less money to spend in the end.

If you're under that magic age of 59 and a half and you think you might need some of the income or the assets but not all of the money, then it might be better to rollover assets to an inherited IRA and if you do that you can withdraw funds before 59 ½ and not pay a penalty; you still have to pay taxes though. And the option of rolling over to an IRA in your own name works really, if you're either older than fifty nine and a half or you don't need the money until later. You want to be very careful about this, because if you do a rollover in your name and then you need the money before 59 ½ you have to pay a 10% penalty on top of the income tax. 

Hillary: What else do widows really need to consider on this?

Dawn: Well, we do have much more information in our article and in addition to age and taxes, before you make a decision you want to look at all your sources of income and assets. It's best really to make this decision in the context of your entire financial picture and we know it can be difficult to start planning a new life if you're recently widowed, but that's really the best way to make a good financial decision. And even if you've already decided what you want to do, you might want help filling out the forms, you want to make sure you execute your decision correctly. You can run into tax trouble if you don't and then lastly, consider your own legacy. If you roll over assets, you want to make sure to designate your beneficiary in case you pass away. 

Shawn: Alright. Good advice. Thanks Dawn. Dawn Doebler, with The Colony Group in Bethesda, you can read more at wtop.com, search Her Wealth.

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Dawn Doebler, MBA, CPA, CFP®, CDFA®, Senior Wealth Advisor

Dawn’s experience spans more that 25 years providing wealth management, financial planning and corporate finance solutions for clients. As an MBA, CPA, Certified Financial Planner (CFP®), and a Certified Divorce Financial Analyst (CDFA®), she is uniquely qualified to understand the challenges and financial needs of clients from executives to entrepreneurs, as well as single breadwinner parents. Dawn is a weekly contributor to WTOP radio.