72t Distributions and Death of IRA Holder
L1: 72t Distributions and Death of IRA HolderCurrently 55 years of age. Have been taking monthly 72t distributions since age 53. What happens to the monthly distributions if I die before age 59 1/2? My wife is keenly interested in what happens to the cash flow and what she has to do. Not that I am planning to expire any time soon, but thought it was a good question.2009-08-18 19:04, By: nativetexan, IP: [184.108.40.206]
L2: 72t Distributions and Death of IRA HolderYour survivor would have a new set of options as death would terminate the SEPP plan. More Details2009-08-18 19:18, By: Gfw, IP: [220.127.116.11]
L2: 72t Distributions and Death of IRA HolderTex:
This is an outstanding question and you are correct to ask it now instead of your wife having to deal with it should you “kick-the-can” early. Death of an IRA owner is a complete subject and depends on so many factors to get it right. The biggest factor is the relationhip of the beneficiary to the IRA owner; spouse or non-spouse. I’ll hit the highlights.
When an IRA owner dies, regardless of age, all IRA assets are available to a “natural person beneficiary” free of any penalty. The spouse beneficiaryhas more options than a non-spouse beneficiary. Since your spouse asked the question, let’s stick to that discussion.
Your wife may either set up an “inherited /beneficiary IRA” account, or she may transfer your IRA into her own IRA. If she is over age 59.5 then most times she makes it her IRA. If she is less than age 59.5, then she will probably set it up as an inherited IRA.
What’s the difference? If she is less than age 59.5 and chooses to make it her IRA, then she has to deal with the early distribution problems that you are dealing with by using 72(t). If she sets up an inherrited IRA, then she can make withdrawals without penalty regardless of her age because,since “death” is an acceptable reason for penalty-free distributions, the inherited IRAallows her to make penalty-free distributionsin any amount and at any time.
Jim2009-08-18 19:26, By: Jim, IP: [18.104.22.168]
L2: 72t Distributions and Death of IRA HolderThe SEPP 72-T plan and required distributions are terminated. The IRA accounts are then transferred to the beneficiary under whichever inherited IRA procedure the beneficiary selects. Surviving spouses can elect to treat the IRA as her own, or can choose to be treated as a beneficiary. If as a spouse, the rules, the rules apply to the inherited account for the calendar year of death and subsequent years as if it were hers all along. She may contribute more to it ( if she has earned income), she is subject to the 10% early withdrawal penalty up to age 59 1/2, Required Minimum Distributions apply when she reaches 70 1/2, etc.
However, in your case, she would probably elect to be treated as a non-spouse beneficiary because the 10% early withdrawal penalty would not apply for distributions before she reaches 59 1/2. She must keep this “inherited IRA” separate from her own IRA, and must make sure to title it very specifically as “NATIVE TEXAN’S IRA FBO MRS. NATIVE TEXAN”. Be careful to follow these rules carefully. Check with a CPA or experienced person at the financial institution.
While she is learning about her options, she should determine at that time that if you are 70 1/2 that YOUR Required Minimum Distribution (RMD) has been taken before she does anything. I require my clients to always take their RMD in January of each year for the coming year to avoid the complications if it isn’t taken before death, or if you become incapacitated during the year and forget, or are unable, to take it.
In addition, she should look into the advisability of doing a CONVERSION TO A ROTH IRA for some or all of the IRA balance if it can be taxed at 15%, especially in the year of death when she will be filing her last joint tax return with lower rates because the taxable limit at that rate is about $ 68,000 while the single rate goes to 25% at $ 34,000 which she will probably be subject to in the year after your death.2009-08-18 19:30, By: dlzallestaxes, IP: [22.214.171.124]
L3: 72t Distributions and Death of IRA HolderDLZ:
I have read and re-read you last post and I keep coming away with a lot of confussion. Please explain what you are talking about in the following sentence which you wrote:
“However, in your case, she would probably elect to be treated as a non-spouse beneficiary because the 10% early withdrawal penalty would not apply for distributions before she reaches 59 1/2.”
A spouse is and always will be a spouse. The only way to change that status is through divorce, and I don’t thinkTex is contemplating that option.
Aspousehas the option to either electsetting up a beneficiary IRA or to treat it like her own by either transferring her deceased husband’s account into her existing IRA or to set one up in her name, funding it with the aforementioned transfer. Like I stated above, a spouse under age 59.5 would generally set up the beneficiary IRA so she could make regular or irregular withdrawals without paying the 10% early withdrawal penalty. Of course ordinary taxes would be required. Tex has identified this as a traditional IRA.
Non-spouse beneficiaries only have the option to set up a beneficiary IRA. They mustbegin Required Minimum Distributions in the year after setting up the beneficiary IRA.
Of course both the spousaland non-spousal beneficiary have the option to liquidate the deceased IRA and pay taxes but not penalty. Distributions because of death are always free of penalty.
Please help us out here, DLZ.
Jim2009-08-19 13:42, By: Jim, IP: [126.96.36.199]
L4: 72t Distributions and Death of IRA HolderWe all know that you cannot trust the IRS. Only the IRS would have a provision whereby a spouse is not a spouse without a divorce. The quote is exactly the way that the IRS provision is worded. If the surviving spouse treats it as a beneficiary IRA or her own IRA, she will be subject to the 10% early distribution penalty if she takes distributions before 59 1/2. However, if she elects neither of those options, but rather to be “treated as’ a non-spousal beneficiary, then she can take distributions at any time after her husband’s death and before she reaches 59 1/2 without incurring the 10% early distribution penalty.
Sorry for any confusion, but this is one of many confusing provisions or nuancesin the tax code.2009-08-19 18:49, By: dlzallestaxes, IP: [188.8.131.52]