Article by Kimberly Polaski, Tax & Business Services Senior & Richard J. Casmirri, Tax & Business Services Manager, "IRA Strategies for Surviving Spouses" Featured in Philadelphia Estate Planning Council
Philadelphia Estate Planning Council
By Kimberly Polaski, Tax & Business Services Senior & Richard J. Casmirri, Tax & Business Services Manager
Inherited IRA Strategies for Surviving Spouses
When a spouse inherits an IRA (Traditional or Roth) from their deceased husband or wife, there are several planning strategies that the surviving spouse can follow in order to meet their specific needs. Spouses who are designated as the sole beneficiary of the IRA have special options available to them compared to the options available for non-spousal beneficiaries. Choosing the correct option for the surviving spouse’s circumstances can be a powerful tool for minimizing IRD, preventing IRS penalties, ensuring the preservation of assets and possibly maximizing the special tax attributes of the account. Each strategy has advantages and disadvantages, and with careful tax and financial planning, the surviving spouse can choose the strategy that best meets their specific needs.
Option 1 – Receive a Distribution for the Amount of the IRA
This option is available to all beneficiaries of IRA’s, whether the beneficiary is the spouse of the decedent or not. Distributions made to a beneficiary from the decedent’s IRA after the decedent’s death are exempt from the Code Sec. 72(t) 10% early withdrawal penalty.
Pros: Receive lump sum of money immediately; avoid 10% early withdrawal penalty. If prior nondeductible contributions were made to the IRA, the beneficiary receives that carryover basis in determining his or her taxable distributions.
Cons: The distribution is taxable, and depending on the size of the distribution, could raise the beneficiary into a higher tax bracket in the year of the distribution.