IRA tips for a surviving spouse : He had some life insurance and a rather large traditional IRA; I am the beneficiary of both. The life insurance company says I can just leave the death benefit with them in an interest-bearing account, and they are sending me checks on which I can write against the account.
The life insurance death benefit is a little bit more than our mortgage. We had just refinanced our home, and our interest rate on a 15-year fixed is 3.75 percent. We paid points to get this low rate so I don't know if it makes sense to pay this off with the life insurance or to keep it in place and use the money in the life insurance account to make my monthly payments. What do you suggest?
Also, what do I do with the IRA? It is my understanding that I can keep this as a beneficiary IRA or make it my own. But I don't really know the difference this may make to me, and the broker either didn't understand it or just wasn't able to explain it to me at my level of understanding financial matters, which is low.
A: I'm sorry to hear of your loss. Many things can get confusing or seem overwhelming after the death of a loved one. Often, the best action plan may be to make as few changes as possible.
Keeping the mortgage and paying the monthly payment from the life insurance proceeds account makes a lot of sense. You have a low mortgage interest rate, and if the interest earned on the life insurance account is typical, it is probably pretty competitive. Over the years, the interest rate on the life insurance account should rise, while the interest on your mortgage will remain fixed at 3.75 percent.
Being the beneficiary
A spouse named as the beneficiary of an IRA has some unique options. As you indicated, as a spousal beneficiary you can either roll over the inherited IRA to your own IRA or remain as beneficiary.
If you transfer the IRA to your own IRA, the inherited IRA is now yours and the rules for calculating the required minimum distributions or RMDs, are the same as for any IRA owner. Nonspousal beneficiaries are not allowed to roll an inherited IRA into their own. The rules concerning distributions from the rollover IRA change depending on your age and your spouse's age at his time of death. The required beginning date for RMDs is April 1 after the year the IRA owner turns 70-1/2. Because neither of you had reached that age at the time of his death, no distribution would be required until you reach age 70-1/2. Any distributions made before you are 59-1/2 would be subject to a 10 percent early withdrawal penalty.
Because you are under age 59-1/2, you may wish to remain as a beneficiary rather than selecting a rollover and becoming the IRA owner. As a spouse choosing to remain as a beneficiary, you must begin taking RMDs by whichever is later, Dec. 31 of the year the IRA owner would have turned 70-1/2, or Dec. 31 of the year following the IRA owner's death.
You have access to the money before the required beginning date. As a spouse beneficiary, if you need some of the money to live on before age 59-1/2 you will avoid the 10 percent penalty. The 10 percent early withdrawal penalty applies to owners, not beneficiaries. These are special spousal rules, but a nonspouse beneficiary must begin RMDs the year after the IRA owner's death. You can still roll the IRA over to your own when you reach 70-1/2. This is beneficial because of the different life expectancy tables used for owners (uniform lifetime table) and beneficiaries (single life expectancy table). The uniform lifetime table has a higher/longer life expectancy factor, so the RMD is lower. The lower the RMD the lower the tax bill, and the benefits of tax deferral remain in place for a longer period of time.
As with most major financial decisions, a consultation with a knowledgeable adviser is recommended. Holly Nicholson is a certified financial planner in Raleigh. Reach her at www.askholly.com or P.O. Box 99466, Raleigh, N.C. 27624. She cannot answer every question.