By J.P. Dahdah, Founder & CEO of Vantage
Perhaps you haven’t felt a need to understand much about IRAs’ beneficiary rules.
Most Americans wind up with the largest portion of their retirement savings within IRAs. Investors spend most of their financial lives identifying the best opportunities to accomplish their financial goals. That’s the fun part!
As a Self-Directed IRA company, however, we serve clients through darker situations as well. Death of a spouse, for example. Widows and widowers end up having to make crucial financial decisions during a very emotional time.
Therefore, we believe it’s important to increase your financial literacy about these unpleasant topics now when you and your IRA beneficiaries are alive and well.
The reality is your situation is unique, and following a rule of thumb may not place you or your IRA beneficiary in the best financial circumstances. I encourage you to have a conversation with your spouse about your IRA rollover strategy is. As uncomfortable as this may seem now, it could save you many unnecessary stress and penalties in the future.
Here are the 3 most common mistakes widows and widowers make when addressing their IRA inheritance:
Paying needless IRA penalties:
One rule of thumb commonly suggests when you inherit an IRA from your spouse, you roll it over into your own IRA. If you are at least 59 ½ years old when your spouse passes, this type of “spousal rollover” generally makes sense since you are past the time frame in which you would be subject to a 10% early distribution penalty on premature withdrawals.
Keep in mind; you would still owe income taxes on any amount you take out of the IRA. This results in many younger women who need the IRA money becoming subject to that 10% early distribution penalty. To avoid this pitfall, people under the age of 59 ½ should consider transferring the deceased spouse’s retirement savings into an “Inherited IRA,” which will remain in the deceased spouse’s name until the survivor reaches 59 ½ and can then transfer the money into their own IRA, avoiding the early withdrawal penalties!
The other important age to keep on your radar regarding IRAs is 70 ½. This is the age at which IRA account holders are required to take a minimum distribution. But if the deceased spouse is not yet 70 ½, the survivor doesn’t have to take any required distributions until the year the deceased spouse would have turned 70 ½.
Portfolio paralysis:
What about the investments held within the inherited IRA? This is usually where most of the confusion arises. The best approach is to have the inherited IRA’s holdings reflect the survivor’s new circumstances, not the couples. The survivor must ask themselves, “What do I want to invest in now, given my new financial situation?” Widows and widowers should access their own risk tolerance, time horizon, investment appetite, and desired lifestyle and work towards creating an IRA portfolio that provides comfort and clarity.
Collecting Social Security too early:
Surviving spouses can start collecting Social Security survivor benefits at age 60, but that doesn’t mean that they should do it. As with your own Social Security retirement benefits, the earlier you choose to start collecting the benefit, the smaller the amount you receive versus what you could get if you wait until your full retirement age.
As you can see, there is a lot to consider and evaluate.
Given the global COVID-19 pandemic we live through, it is even more important to plan for the unplanned. Would you want to be placed in a position to make all of these critical decisions days or weeks after your spouse has passed? Highly doubtful. At Vantage, we take pride in helping our clients navigate these difficult days in their life, as well as the bright ones. At the core of our service is education, so we hope this article encourages you to ask the tough questions now and seek the professional help you may need to make the best decision for your family.
Happy investing & Stay Healthy!
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