Can my husband continue to make withdrawals from an inherited IRA if I pass away and he is not yet age 59 1/2?
I am 77 years old, and collecting Social Security. My spouse is 50 and the sole heir of my IRA. I make minimum required distributions from my IRA based on the life expectancy of the two of us. If I die, leaving the IRA to my spouse while he is not yet 59 1/2, can he continue to make IRA withdrawals without penalty? Can he take my Social Security monthly benefit or part of it right away? He will be entitled to a Social Security benefit based on his own work, but it is not as big as mine.
Since you are 77 years old and already taking your required distributions, the IRS provides three options for a spouse after the passing of an account holder:
Option 1: Take the IRA into his own name (This option would NOT accomplish your goal of avoiding the 10% penalty).
Option 2: Take the IRA into an Inherited IRA and start distributions based on his life expectancy number.
Option 3: Take all of the money out of the IRA.
Option 2 and 3 would avoid the 10% penalty, but income tax of course would be due on any distribution.
So yes, your husband will be able to take distributions from the an IRA without penalty.
A couple things:
1) If he treats the IRA as an Inherited IRA, then it he will have withdrawal flexibility before age 59.5. If he rolls it into a regular IRA (which is a provision specifically allowed to spouses whom inherit IRAs), then it will be subject to the 59.5 rule. In short, he has plenty of options available to help meet whichever goal you'd like, and will simply want to meet with your financial advisor when that unfortunate time comes.
2) He'll want to compare his Social Security benefit to what he could potentially claim as a spousal benefit on your record. The rule is generally that he can claim the higher of his benefit or 1/2 of your benefit. At 50 years old he still has many working years left (assuming he's working) to increase his potential benefit.
3) You might consider whether some kind of Roth conversion strategy is appropriate. This may be helpful at mitigating your long term tax burden if this IRA represents the most significant part of your wealth and future income. These strategies can be complex so don't hesitate to reach out to me or another competent fiduciary to get a bit of assistance.
4) Your beneficiary designation is a great way to streamline your estate plan. You might also review if your state allows for beneficiary deeds on real estate, transfer on death provisions on auto titles, and payable-on-death provisions on your savings and checking accounts, Of course, if any of these are jointly held with your husband then there's no need to amend, but if they're solely owned by you it may be helpful to outline some of these terms.
As mentioned above, if I can help navigate any of this or provide additional clarity, I'm happy to do so.
Adam Harding, CFP
Here are summaries of my answers with links to more detailed information:
- Inherited IRA: Yes, he can create an inherited IRA (rules below) and continue to take distributions WITHOUT Penalty. He could then roll it into his own IRA after age 59 1/2 and take distributions without penalty and stop RMDs if he likes (only a spouse can do that).
- Social Security: Your husband can make a claim for survivor benefits under Social Security as early as age 60 (if he does not get remarried before age 60) and then switch to his later (at Full Retirement Age or as late as age 70) if his benefit IS HIGHER. That is one of the Social Security Maximixation Strategies. If his is not higher, he may be better off waiting until his full retirement age (around age 66 to 67) depending on his health and other retirement assets or resources.
As a Ed Slott Elite IRA Advisor, I'd also like to point you to this great summary from Ed Slott on Rules for inheriting an IRA.
Unfortunately, a spouse will treat the inherited deceased spouse's IRA as their own. Therefore, penalties will apply on distributions until age 59 1/2. Regarding Social Security, those benefits can be pretty tricky so I have attached the Social Security website link to help you do the calculations. But normally the spouse has to be age 62 before they can receive spousal benefits.
Hope this helps and best of luck, Dan Stewart CFA®
Your husband will have a choice when the time comes. He can either the account into an inherited IRA to keep the tax shelter. Or he can choose to roll the account into his own IRA.
If you think he needs the money and is younger than 59 ½ by the time he inherits it, then it would be better off remaining a named beneficiary. If he rolls the money into her IRA and then withdraws any of it, she'll pay a 10% penalty until 59 1/2. Instead, if she remains a named beneficiary, he can tap the account without penalty. To be a named beneficiary, he must retitle the account as an inherited IRA.
He can also decide to roll the money into his own account at any time.