Due to tax laws and distribution rules, knowing your IRA options can get quite confusing. An article on Time.com (http://time.com/money/3962730/costly-ira-myths/) recently addressed some of the misconceptions about IRA’s and explained the most beneficial actions to take. The article is written from the point of view of a financial advisor who has witnessed the confusion about IRA’s first-hand when speaking with his clients. The first Myth scenario he presents is where widow inherits an IRA from their spouse and takes a lump sum distribution. He made the following points about this concept:
- A lump sum distribution will result in large tax on the total amount
- If the widow is not yet 59 ½ years old there will also be an early withdrawal penalty
- Keeping the asset as an inherited / rollover IRA is the best option in this case
- Maintaining the IRA allows for the widow to take distributions from the account without the large tax and penalty
- Once the widow turns 59 ½ they can take advantage of spousal rollover.
- Spousal rollover allows the spouse to move the funds into his/her own name and change it to their own date of birth, which is beneficial if they are younger than the deceased spouse because the required minimum distribution is calculated based on date of birth
The second Myth scenario that is addressed in the article is where having a Last Will and Testament ensures that the IRA will be distributed correctly:
- Naming your estate as the primary beneficiary to your IRA can result in major complications and a major tax bill
- Naming your spouse as the primary beneficiary is the best option in this case because it will avoid the tax bill and probate process. Additionally, the spouse can eventually take advantage of spousal rollover
- You can also name your children as contingent beneficiaries on the IRA
- Naming your children as contingent beneficiaries will reduce some of the planning for the surviving spouse in the long run
- The beneficiary form trumps what the Will says
If you are unsure about your options for financial or estate planning it is always advised to seek assistance from a knowledgeable professional. Please feel free to contact us at Tully Law, P.C. if you have any questions about your planning options.