“In this world nothing can be said to be certain, except death and taxes.”
This truism, attributed to Ben Franklin, raises the unthinkable: What will happen to your spouse if you die first? Or, more specifically, how can you plan for the best disposition of your Individual Retirement Account (IRA) to make the changeover relatively painless?
An IRA allows you to save money for retirement, tax deferred. Only amounts actually withdrawn from an IRA in retirement are taxable; all remaining amounts continue to grow, tax deferred, until withdrawn.
If you have an IRA, are withdrawing income from it, and have listed your partner as your beneficiary, there are choices he or she will have: Your spouse won’t have to take a lump-sum withdrawal and pay all of the income tax on it at once.
Of course, he or she can take a lump-sum withdrawal and report that entire amount as taxable income in the year the account was liquidated. But another option is treating the IRA as an “inherited” IRA and taking required minimum distributions (RMDs.) Alternatively, he or she can create a “spousal rollover” IRA.
Under the spousal rollover option, your spouse can use his or her age to determine when RMDs must begin and the correct life expectancy factor to use when calculating the RMDs.
This may be the most appealing option, but the takeaway is that you and your spouse should plan ahead. As individual circumstances differ, also consult with your advisor before making a final decision.