A Potentially Costly Mistake for a Widow Under Age 59-½

Among the myriad of decisions a widow has to make, one that often comes up is what to do about her husband’s IRA. If you are younger than 59 ½, here is advice that may help keep you from making a potentially costly mistake.

“Did you hear what happened to Monica?” Susan said.

Beth leaned in closer to hear Susan over the general buzz of conversation at their favorite coffee house. “No. What?”

“She had to pull money out of her IRA,” said Susan, “to pay for a new air conditioning system at her house.”

“What’s the big deal about that?” The heat from the coffee cup felt soothing to Beth. Everything had been so complicated and overwhelming lately. Taking time out to sit with her friend was a much-needed respite.

“She told me that she had to pay a huge penalty on her withdrawal because of something she did wrong shortly after Matthew died,” Susan said.

“What did she do wrong?” asked Beth.

“I don’t know. I sure hope it doesn’t happen to me. I’ve already told Charles he is not allowed to die before me. I’ve seen how hard it has been for you since your husband died.” Susan rested a comforting hand on Beth’s arm.

“Thank you. There has been so much more to do than I expected. I was just about to deal with John’s IRA. Maybe I should talk to my financial advisor about it first,” said Beth.

“Sounds like a good idea to me.”

A couple days later, at her appointment with her financial advisor, Beth told him the story she had heard about IRAs and withdrawal penalties.

“Larry, is this going to happen to me too?” asked Beth. “Maybe I should put the money somewhere else or just withdraw it all now.”

“Before you take such a drastic action, let me ask, how old is Monica?” asked Larry.

“Her kids are still in high school, so probably in her late 40s.”

“It sounds like Monica rolled her husband’s IRA funds into an IRA of her own. By doing this she made herself subject to the the 10% early withdrawal penalty on distributions taken before age 59-½.”

“That’s probably what happened. I’m a little worried about my house too. Just last fall, John and I were discussing the need for a new roof. I don’t have any savings set aside for big house maintenance issues. What should I do with his IRA now so I can use part of this money if I need to?”

Larry replied, “Because you are a widow who is younger than 59 1/2 and may need some of your husband’s IRA money to live on, it would be advisable for you to remain a named beneficiary. The rules governing inherited IRAs are more generous for spouses than for other beneficiaries. A widow who inherits an IRA has a choice. By not taking ownership of the IRA funds you can take withdrawals from the account without penalty. All you will need to do is retitle the account as an inherited IRA. Also, you are not locked into this option, at any time you can roll the money to your own IRA in the future.”

In my role as an advisor, I collaborate with my clients to help them make informed choices. If you are under the age of 59-½, one wrong decision can lead to potentially expensive consequences. Consider your income and expense needs before choosing the surviving spouse election for your husband’s IRA. If there is a possibility you may need to take a distribution from the IRA in the future, choose to remain a beneficiary rather than rolling it over and taking “ownership” of the funds. As a beneficiary, you won’t have to pay the 10 percent early withdrawal penalty on a distribution. Once you roll it over to your own IRA, this exception no longer applies while under the age of 59 1/2. Take some time. Consult with an advisor to help you make an optimal decision for your future.

~Laura

 Above is a hypothetical illustration and individual results will vary. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James does not offer tax advice. Please consult your tax advisor for questions regarding your tax situation. Any opinions are those of Laura L. Amendola and not necessarily those of Raymond James.