Q: I understand that if I survive my spouse (I am the beneficiary of my husband’s IRA) I have the option to roll over his IRA into my own IRA or, as a second option, I can take the IRA as an inherited IRA (and not roll the IRA into my own).
My husband passed away and I am under age 59 ½. If I choose the inherited IRA approach, can I withdraw money from the inherited IRA without paying a 10% penalty?
Answer: While there are exceptions to the rule, in general, an individual who has not attained the age of 59 ½ will pay a 10% penalty if he withdraws funds from his own IRA.
When a spouse inherits the IRA and chooses not to do a spousal rollover, the spouse who is under age 59 ½ may withdraw funds from the inherited IRA without paying the 10% tax penalty. However, the distributions from a traditional IRA will still be subject to regular income tax.
Comment: As with spousal beneficiaries, a nonspousal beneficiary doesn’t have to pay the 10% early withdrawal penalty on pre–age 59½ distributions from an inherited IRA. However, other complications may arise if there are multiple beneficiaries named or the IRA owner designates a trust or charitable organization as the beneficiary.
Based on recent tax proposals by Congress, the benefits of stretch IRAs could be diminished by requiring beneficiaries to empty out accounts faster.
As always, if you have any questions or would like to learn more, please contact me at email@example.com or 301-575-0313.
ABOUT STEVE SHANE
Steve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates.
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