Retired on Disability/Died – Wife under 59 1/2

L1: Retired on Disability/Died – Wife under 59 1/2We have a situation where person (under 59 1/2) rolled his PST to an IRA under total disability provisions and has been taking IRA distributions. Person how deceased. Primary beneficiary is wife who is 57 years old.
Do the rules revert back where she must take SEPP until age 59 1/2 even though they”ve been living on the IRA with no restrictions?2007-07-30 08:57, By: Kim, IP: [24.172.244.211]

L2: Retired on Disability/Died – Wife under 59 1/2Kim,
No, there is no need for a SEPP here. First, I assume you meant TSP (not PST), but if the inherited IRA remains in beneficiary form, there is no early withdrawal penalty because it is inherited. However, if the wife assumes ownership or rolls the funds to her own IRA, being under 59.5, she faces early withdrawal for 2.5 years. The solution is NOT to roll it over until she reaches age 59.5. Moreover, she does not have an RMD requirement from the inherited IRA until the year her husband would have reached age 70.5.
If there IS an RMD requirement (husband would have reached 70.5 before survivor reaches 59.5) for the inherited IRA that is missed, the IRS defaults into ownership status, and that would expose distributions to penalty for up to 2.5 years. 2007-07-30 19:35, By: Alan S., IP: [24.116.165.60]

L2: Retired on Disability/Died – Wife under 59 1/2Kim:
UnderNO circumstances should the beneficiary spouse transfer her deceased husband”s IRA into her name! She should have it retitled as an Inherited IRA. The IRA custodianwill be able to take care of this situation. DO NOT attempt this as a DIY activity. Simply put, death distributions are not subject to the 10% early distribution penalty. So while you have an Inherited IRA, there is no penalty for distributions.
If the wife transfers the husband”s IRA into one titled in her name, then she will be governed by normal IRA rules. Since her age is 57, then she will be subject to the 10% penalty until she reaches age 59 1/2.
Part of the process to set up an Inherited IRA is to make new beneficiary designations. Let”s assume the couple had two children and they were previously designated as “Contingent Beneficiaries.” Since the spouse will be listed as “Beneficiary” in the title of the IRA, she needs to complete a new “Beneficiary Designation” form naming her children as “Primary Beneficiaries” for the account. Caution: Don”t let the wife name a charity and her children as beneficiaries as this really screws things up for her kids. Get competent advice on the subject of Beneficiary Disignations.
Alan:
I”m not sure aboutyour last paragraph. If the wife sets up a proper “Inherited IRA” and if the husband had died on or after RBD, then she would only be subject to RMD”s. She could, of course, continue to withdraw her needs as long as they were equal to or greater than the annual RMD, and would not be subject to any early withdrawal penalty. Please explain why she would become subject to EWP for 2.5 years if the husband died on or after RBD.
Jim2007-07-31 07:50, By: Jim, IP: [24.252.195.14]

L2: Retired on Disability/Died – Wife under 59 1/2Jim,
I think Alan”s last paragraph does explain it. To me, he is pointing out a hypothetical problem that could cause a change in the status of the inherited IRA, and in this specific instance he cited,if it happened the beneficiary would not be able to take penalty free withdrawals until after 59 1/2. Here it is again… KEN
IF there IS an RMD requirement (husband would have reached 70.5 before survivor reaches 59.5) for the inherited IRA that is missed, the IRS defaults into ownership status, and that would expose distributions to penalty for up to 2.5 years.
2007-07-31 15:11, By: Ken, IP: [75.67.65.254]

L2: Retired on Disability/Died – Wife under 59 1/2Yes, Ken explained this correctly. The reference for this “default to ownership status” is in Pub 590, p 20.
She should still title it is inherited, but then be sure to take her inherited IRA RMD IF required. If husband would not yet have reached 70.5, she has no RMD requirement, but if he would have reached it before she reached 59.5, then she does have an RMD requirement. It”s quite commonplace for a widow to overlook the RMD if she has no current cash needs, and is not getting good advice.2007-07-31 16:25, By: Alan S., IP: [24.116.165.60]

L2: Retired on Disability/Died – Wife under 59 1/2Alan & Ken:
Thanks for your comments. I didn”t catch Alan”s message when I read his last paragraph, but I see what he”s saying now.
Of course, if the IRA owner dies on or after his / her Required Beginning Date (RBD), whichis defined as “by April 1st of the year after turning age 70 1/2,” then the beneficiary must take the Required Minimum Distribution (RMD) before December 31stof the required distribution year. Missing this distribution creates lots of problems, including the 50% tax penalty of the RMD amount for failing to make this distribution, in addition to the regular tax, and making the inherited IRA “like their own” for the beneficiary. Said another way, this creates a real bucket of worms.
By the way, because of this problem I have begun switching my clients to an early distribution rather than later in the RMD year. Too many want to wait till the end of December and that just doesn”t work.
Jim2007-08-01 11:44, By: Jim, IP: [24.252.195.14]

L2: Retired on Disability/Died – Wife under 59 1/2I agree with Jim. I have been having my clients take RMD distributions early each calendar year, for 2 reasons. First, it avoids the potential problems if the person dies before taking the RMD. Second, if the investments are stocks and equity mutual funds, the growth after the distribution will be taxed at capital gains rates (15%) if sold more than 1 year later, rather than having thatGROWTH &DIVIDEND INCOMEultimately taxed at ordinary tax rates (25%-35%) whenever distributions are taken. Prior to 70 1/2 I determine if they are in the 15% tax bracket, and have then take distributions, or even convert to ROTH IRAs, up to the 15% tax limit (before 25% starts).2007-08-01 13:08, By: dlzallestaxes, IP: [141.151.3.18]

L2: Retired on Disability/Died – Wife under 59 1/2 I”m being told by our custodian that if I put the IRA into an inherited IRA for spouse that she will have to take MRD”s based on her life expectancy??? I know a non-spouse has to do this. I didn”t realize a spouse had to also. They are also saying she can take a lump sum distribution or the 5 year rule.
Here are my questions – is it true that she has to start taking MRD”s based on her life expectancy this year? (spouse was under 70 1/2 – “retired” on disability) If yes, I guess the picture would be that she takes MRD for 2 years (she”s 57) and then we transfer to her own IRA and she can then do anything she wants?
Can she take any amount “above” the MRD amount she wants with no penalty while in an inherited IRA account?

2007-08-09 07:29, By: Kim, IP: [24.172.244.211]