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What Happens to Your IRA When Your Spouse Dies? Financial Advisor Explains · Well Advised Wealth

• 0:00
  SPEAKER_01: Say your spouse passes away.
• 0:01
  SPEAKER_01: Beneficiaries no longer get the money that they were promised.
• 0:05
  SPEAKER_01: They get completely cut out, and sometimes that's not anyone's intention.
• 0:08
  SPEAKER_01: The IRS language is confusing.
• 0:10
  SPEAKER_01: And you're doing all this while trying to plan funeral and going through the emotions of losing a spouse.
• 0:15
  SPEAKER_01: Most people don't know they have choices and they just take whatever default paperwork hands them.
• 0:20
  SPEAKER_01: Now, some decisions do have to be made quickly, but they don't have to be made irrationally.
• 0:26
  SPEAKER_01: One phone call could save you a lot of money in taxes, heartache, and grief.
• 0:31
  SPEAKER_01: That single decision right there can cost real money in exactly the moment that you can least afford to make it.
• 0:38
  SPEAKER_01: Welcome in.
• 0:39
  SPEAKER_01: This is the Well Advised Wealth Podcast.
• 0:42
  SPEAKER_01: I'm your host, Justin Chastain, certified financial planner.
• 0:45
  SPEAKER_01: And every week I help successful business owners and families create wealth that last.
• 0:51
  SPEAKER_01: I want everybody to kind of put themselves in this driver's seat as I paint this picture.
• 0:56
  SPEAKER_01: It's not a very pleasant one, but it is one we have to talk about, and I do get a lot of questions around.
• 1:00
  SPEAKER_01: But say your spouse passes away, and that could come as a shock to you, especially if you're not married.
• 1:06
  SPEAKER_01: In 30 days, you get a letter from the custodian or the company that manages your money with four different options on it and a deadline attached to at least one of them.
• 1:14
  SPEAKER_01: No warning, no dress rehearsal, just you trying to read IRS language and a lot of it's gobbledygoop.
• 1:20
  SPEAKER_01: Yes, that is a real word.
• 1:21
  SPEAKER_01: Look it up in Noah's Webster's dictionary.
• 1:23
  SPEAKER_01: The IRS language is confusing.
• 1:25
  SPEAKER_01: And you're doing all this while trying to plan funeral and going through the emotions of losing a spouse.
• 1:30
  SPEAKER_01: The problem is in that moment that you're making those decisions, one decision can make a permanent choice and last.
• 1:37
  SPEAKER_01: And picking the wrong option can mean paying tens of thousands of more in taxes than you had to.
• 1:42
  SPEAKER_01: Today I'm going to walk you through what we call an inherited IRA, and there's some spousal rollover opportunities, and specifically what happens to a retirement account when a spouse passes it to another spouse, the good, the bad, the ugly, and how that actually plays out.
• 1:56
  SPEAKER_01: So let's get into it.
• 1:57
  SPEAKER_01: Why does it matter talking about this?
• 1:59
  SPEAKER_01: Well, when one spouse passes away and leaves an IRA to the surviving spouse, that spouse is in a category the IRS determines as an eligible designated beneficiary.
• 2:09
  SPEAKER_01: It just means you got options.
• 2:10
  SPEAKER_01: Nobody else inheriting that IRA is going to get.
• 2:13
  SPEAKER_01: Almost every other beneficiary, from adult children to grandkids to siblings, is stuck within a 10-year rule.
• 2:19
  SPEAKER_01: That means the account has to be fully emptied within 10 years of death, full stop.
• 2:24
  SPEAKER_01: No questions asked, don't pass go without collecting$200.
• 2:28
  SPEAKER_01: A spouse isn't boxed into that.
• 2:30
  SPEAKER_01: A spouse has real choices, and the choice they make can affect their taxes, required minimum distributions, and even what happens beyond their life expectancy here when they pass it on to their children.
• 2:43
  SPEAKER_01: Here's the problem.
• 2:44
  SPEAKER_01: Most people don't know they have choices, and they just take whatever default paperwork hands them.
• 2:50
  SPEAKER_01: Sounds familiar.
• 2:51
  SPEAKER_01: A lot of it does when we're working with clients through Social Security decisions.
• 2:55
  SPEAKER_01: People at the Social Security office, as great as they are, listen, and they pride themselves on customer service.
• 3:01
  SPEAKER_01: Isn't that the Social Security or DMV that has such great customer service?
• 3:05
  SPEAKER_01: Or maybe it's Chick-fil-A.
• 3:06
  SPEAKER_01: Let's not get into semantics here.
• 3:08
  SPEAKER_01: What I am going to tell you is a lot of times government opportunities or paperwork is not built for you to make the right choice.
• 3:14
  SPEAKER_01: It's built for you to make the easiest for them to process.
• 3:18
  SPEAKER_01: Before we go any further, I do want to define some basic terms.
• 3:21
  SPEAKER_01: So I mentioned an eligible designated beneficiary.
• 3:24
  SPEAKER_01: What does that mean?
• 3:25
  SPEAKER_01: It's the most favorable category out there from an IRS perspective.
• 3:29
  SPEAKER_01: It means you can take the inherited IRA or IRA passed to you from someone else, and you can carry it as your own, and you don't have to wait or pay the money out in 10 years.
• 3:41
  SPEAKER_01: The IRS designates five people for this: the spouse, of course, a minor child, someone who is disabled or chronically ill.
• 3:49
  SPEAKER_01: And this last one surprises a lot of people.
• 3:52
  SPEAKER_01: Anyone not more than 10 years younger than the original IRA owner.
• 3:56
  SPEAKER_01: So if the IRA owner is 71 when they pass, they could literally pass it to a friend, a sibling, a business partner, a girlfriend, hopefully if they're not married, if they're within 10 years of the owner's age, they would qualify.
• 4:09
  SPEAKER_01: So what I'm saying is Leonardo DiCaprio, his girlfriends would not qualify to be an eligible designated beneficiary.
• 4:16
  SPEAKER_01: What are they?
• 4:16
  SPEAKER_01: They're designated beneficiaries.
• 4:18
  SPEAKER_01: Anyone else who is named as an individual in the account that doesn't meet that first eligible designated beneficiary.
• 4:25
  SPEAKER_01: Most adult children and grandchildren, Leonardo DiCaprio, his girlfriends.
• 4:30
  SPEAKER_01: You can have a non-designated beneficiary.
• 4:32
  SPEAKER_01: Well, what does this mean?
• 4:34
  SPEAKER_01: This is the third category, but this is just really a beneficiary that's not a person at all.
• 4:38
  SPEAKER_01: It can be an estate, it can be a trust, and they're going to have different rules altogether.
• 4:43
  SPEAKER_01: This group actually gets the worst treatment of the three.
• 4:46
  SPEAKER_01: They have a five-year rule instead of the 10.
• 4:49
  SPEAKER_01: So that means they have to get rid of the money within five.
• 4:52
  SPEAKER_01: But do keep in mind you can leave an IRA to a non-individual.
• 4:58
  SPEAKER_01: So just keep those in your head as we go through and as we go along.
• 5:01
  SPEAKER_01: So here's the good: a surviving spouse has more flexibility here than any other beneficiary in the tax code.
• 5:07
  SPEAKER_01: But the two main paths, completely different under the hood, and mixing them up, is where most of the confusion comes from.
• 5:14
  SPEAKER_01: So let's walk through exactly what each one actually is.
• 5:17
  SPEAKER_01: Option one, the spouse has a rollover opportunity.
• 5:21
  SPEAKER_01: Now, what does this mean?
• 5:22
  SPEAKER_01: This is different than the inherited IRA.
• 5:25
  SPEAKER_01: And this is what most people think when they hear rollover.
• 5:27
  SPEAKER_01: You can take your spouse's IRA and literally merge it into your own IRA.
• 5:32
  SPEAKER_01: You retitle it into a brand new IRA in your own name.
• 5:36
  SPEAKER_01: Once that happened, the account stops being inherited.
• 5:39
  SPEAKER_01: It's just your IRA now, one that you have.
• 5:42
  SPEAKER_01: That means RMDs are going to be calculated off your own age, and they don't start until you hit your RMD age.
• 5:48
  SPEAKER_01: You can keep contributing new money if you're still working and eligible.
• 5:52
  SPEAKER_01: And you name whoever you want as new beneficiaries.
• 5:55
  SPEAKER_01: Under the normal rules, everybody else follows.
• 5:57
  SPEAKER_01: Here's the trade-off.
• 5:58
  SPEAKER_01: Because it's now legally your IRA.
• 6:01
  SPEAKER_01: The IRS treats early withdrawals exactly like it would treat from an IRA of your own.
• 6:07
  SPEAKER_01: You pull money out before 59 and a half.
• 6:10
  SPEAKER_01: You owe the standard 10% early withdrawal penalty on top of ordinary income tax.
• 6:15
  SPEAKER_01: So if you need the money soon and you're under 59 and a half, the spouse of rollover might not make sense for you to do.
• 6:23
  SPEAKER_01: Here's option two as a spouse.
• 6:25
  SPEAKER_01: Stay as a beneficiary.
• 6:26
  SPEAKER_01: This is the inherited IRA.
• 6:28
  SPEAKER_01: Here you don't merge anything.
• 6:29
  SPEAKER_01: The account stays titled as an inherited IRA, and it's legally still tied to your late spouse with you as the named beneficiary.
• 6:37
  SPEAKER_01: Because of that, they're separate status.
• 6:39
  SPEAKER_01: A few things flip.
• 6:40
  SPEAKER_01: You can now take the money out at any age for any reason with 0-10% early withdrawal penalty.
• 6:46
  SPEAKER_01: That protection exists specifically because it's an inherited account, not yours as a spouse.
• 6:52
  SPEAKER_01: RMDs are going to be based on your own life expectancy as the beneficiary.
• 6:57
  SPEAKER_01: And this is a part that catches people off guard.
• 6:59
  SPEAKER_01: You actually get to choose when they start, either the year after your spouse died, or if your spouse has not reached required minimum distribution age yet, you can wait until the year your spouse would have turned required minimum distribution age.
• 7:13
  SPEAKER_01: What you can't do here is add new contributions.
• 7:15
  SPEAKER_01: It's frozen at whatever it came to you from your spouse, growing only through the investment returns until you eventually convert it.
• 7:22
  SPEAKER_01: Here it is in plain English.
• 7:24
  SPEAKER_01: Well, a little bit of a southern plain English version.
• 7:27
  SPEAKER_01: Again, as I said, we don't allow diction to get in the way of good conversation.
• 7:30
  SPEAKER_01: But this just means when we're talking about a rollover, it becomes yours.
• 7:34
  SPEAKER_01: Early withdrawal penalties apply before 59 and a half.
• 7:38
  SPEAKER_01: RMDs run on your clock timing, and you can save new money.
• 7:42
  SPEAKER_01: That's the rollover.
• 7:43
  SPEAKER_01: Staying a beneficiary means it technically is inherited.
• 7:47
  SPEAKER_01: No early withdrawal penalty ever.
• 7:49
  SPEAKER_01: RMD timing can be delayed and calculated on a different schedule, but you can't add new contributions.
• 7:56
  SPEAKER_01: But I feel like this is a little bit of the old Billy Mays.
• 8:00
  SPEAKER_01: And there's more.
• 8:01
  SPEAKER_01: Here's a third move nobody expects a hybrid.
• 8:04
  SPEAKER_01: You can stay a beneficiary first, especially if you're under 59 and a half and you need access to that money, and then eventually roll the remainder into your own IRA as a spousal rollover.
• 8:16
  SPEAKER_01: This allows non-spouse beneficiaries never to get to choose between these pass at all, like a spouse does.
• 8:22
  SPEAKER_01: You have the flexibility as a spouse.
• 8:25
  SPEAKER_01: So as a spouse, you have that hybrid opportunity.
• 8:28
  SPEAKER_01: Here's the bad.
• 8:29
  SPEAKER_01: Here's where the letter with the deadline problems show up.
• 8:32
  SPEAKER_01: A lot of custodians default a surviving spouse right into a rollover unless someone tells them otherwise.
• 8:38
  SPEAKER_01: That's not automatically the right call.
• 8:40
  SPEAKER_01: If you, as the surviving spouse, are under 59 and a half and need the money right away, rolling it over into a rollover, what are you going to have?
• 8:49
  SPEAKER_01: Well, you're going to have a 10% early withdrawal penalty and ordinary income tax on that.
• 8:54
  SPEAKER_01: So staying a beneficiary first would have let you have access to the funds penalty free.
• 8:58
  SPEAKER_01: That single decision right there, made without anything walking you through them, can cost real money in exactly the moment that you can least afford to make it.
• 9:06
  SPEAKER_01: Also, if that original owner account had already started RMDs before they died, you, as the surviving spouse, has to make sure any RMD the deceased person didn't finish in the year of their death still gets taken.
• 9:19
  SPEAKER_01: If you miss it, there would be a penalty on that too.
• 9:22
  SPEAKER_01: Here's the ugly.
• 9:23
  SPEAKER_01: This is where it gets genuinely painful.
• 9:25
  SPEAKER_01: And this is more common than people think with blended families.
• 9:28
  SPEAKER_01: Or if you are Johnny Carson and you've had multiple marriages, if a surviving spouse rolls the IRA into their own name and then renames beneficiaries, the deceased spouse beneficiaries no longer get the money that they were promised.
• 9:43
  SPEAKER_01: They get completely cut out.
• 9:44
  SPEAKER_01: And sometimes that's not anyone's intention.
• 9:46
  SPEAKER_01: They just don't know that when you roll it over, it now becomes your own.
• 9:50
  SPEAKER_01: And when you make those changes, this can make a lasting impact to the legacy or giving that you wanted to pass on.
• 9:58
  SPEAKER_01: Here's the other ugly scenario.
• 10:00
  SPEAKER_01: A surviving spouse rolls everything into their own IRA immediately out of instinct.
• 10:04
  SPEAKER_01: And then six months later, you need$40,000 for something urgent.
• 10:08
  SPEAKER_01: Well, now you've got a 10% penalty on top of ordinary income tax on what would have ordinarily just come out clean if you would have chosen an inherited IRA first.
• 10:17
  SPEAKER_01: As I said, you can do a hybrid, but you have to elect an inherited IRA first, and then you have time to choose a rollover spousal IRA.
• 10:26
  SPEAKER_01: But it doesn't work the other way.
• 10:28
  SPEAKER_01: Once you have elected to do a spousal rollover, you can't go back to an inherited IRA.
• 10:33
  SPEAKER_01: Your move has been completed.
• 10:37
  SPEAKER_01: So let's think about things we can do if we get put into this situation.
• 10:41
  SPEAKER_01: Number one, do not sign anything within the first 30 days on autopilot.
• 10:46
  SPEAKER_01: I know it's easy to do.
• 10:47
  SPEAKER_01: When you go through grief, when my mom died, we made mistakes ourselves, but the spousal rollover isn't going anywhere.
• 10:53
  SPEAKER_01: It can wait a few weeks, it can wait some time.
• 10:56
  SPEAKER_01: Don't make the decision just to do a spousal rollover, especially if you're under 59 and a half and you need the money immediately.
• 11:04
  SPEAKER_01: Number two, figure out your age and your income needs first before you pick a path.
• 11:10
  SPEAKER_01: So if you're under 59 and a half and you might need the money, stay a beneficiary initially.
• 11:14
  SPEAKER_01: Not going to touch it for a few years, then the rollover might make sense.
• 11:18
  SPEAKER_01: Take your time and understand the income needs before you pick a path.
• 11:22
  SPEAKER_01: If you are a blended family, have the beneficiary conversation out loud in writing sooner rather than later.
• 11:29
  SPEAKER_01: That is the single most common source of ugly scenario, and it's completely preventable.
• 11:34
  SPEAKER_01: Have honest conversations with your family.
• 11:37
  SPEAKER_01: So here's our weekly wealth minute.
• 11:39
  SPEAKER_01: If you are a beneficiary on a spouse retirement income account right now, go check one thing this week.
• 11:46
  SPEAKER_01: Do you actually know what your options are, or are you assuming there's only one path?
• 11:52
  SPEAKER_01: Most people assume the custodian's default paperwork is the only choice.
• 11:56
  SPEAKER_01: It is almost never is.
• 11:59
  SPEAKER_01: One phone call could save you a lot of money in taxes, heartache, and grief, but it's that phone call that could change and just saying, hey, what are all my options?
• 12:09
  SPEAKER_01: Not just how do I do this rollover.
• 12:11
  SPEAKER_01: It's worth more than anything else you could do with that account in year one.
• 12:16
  SPEAKER_01: Thinking through it.
• 12:17
  SPEAKER_01: I tell this to my clients all the time.
• 12:19
  SPEAKER_01: When you go through grief or tragedy and you're looking at how to navigate the next financial step, take a deep breath.
• 12:27
  SPEAKER_01: Now, some decisions do have to be made quickly, but they don't have to be made irrationally.
• 12:33
  SPEAKER_01: And you have to understand when you go through grief, there's going to be some high emotions and some irrationality.
• 12:39
  SPEAKER_01: Not that you're an irrational person, but you need time to step away from that.
• 12:43
  SPEAKER_01: As I define wealth, as we talk about this, what are the five types?
• 12:48
  SPEAKER_01: Your time, your physical health, your mental health, your social circle, your social health, and last your financial health.
• 12:54
  SPEAKER_01: All five of these will be affected through grief.
• 12:57
  SPEAKER_01: Don't just assume that just because this can affect your financial health, this doesn't bring its ugly head into your time component, your physical health, your mental health, and your social health.
• 13:08
  SPEAKER_01: All of those need to be talked about as you are going through an inherited IRA.
• 13:14
  SPEAKER_01: That's it for this episode.
• 13:16
  SPEAKER_01: But just remember, an inherited IRA doesn't come with an instruction manual.
• 13:20
  SPEAKER_01: It comes with a deadline in four boxes on a form nobody explained to you.
• 13:24
  SPEAKER_01: And quite honestly, nobody's going to parties and saying, Do you know the difference between an eligible beneficiary and a designated beneficiary?
• 13:32
  SPEAKER_01: Nobody knows.
• 13:33
  SPEAKER_01: And quite honestly, people should care.
• 13:35
  SPEAKER_01: And I wish more people did have this conversation at parties.
• 13:38
  SPEAKER_01: Maybe I would be invited to more.
• 13:39
  SPEAKER_01: But don't just check one box because it's on top.
• 13:42
  SPEAKER_01: Call somebody first.
• 13:44
  SPEAKER_01: Preferably me.
• 13:45
  SPEAKER_01: I'm Justin Chastain.
• 13:46
  SPEAKER_01: Build wealth and live well.
• 13:48
  SPEAKER_01: See you next week.
• 13:50
  SPEAKER_00: Parallel Financial, LLC, is a member firm of the Fiduciary Alliance, LLC, which is a registered investment advisor.
• 13:59
  SPEAKER_00: More information about Parallel Financial can be found in Form ADV Part 2, which is available upon request.
• 14:07
  SPEAKER_00: This website is for informational purposes only and should not be construed as investment advice or a recommendation to buy or sell any security or other investment or to undertake any investment strategy.
• 14:20
  SPEAKER_00: Opinions expressed herein are solely those of Parallel Financial LLC unless otherwise specifically cited.
• 14:28
  SPEAKER_00: Material presented is believed to be from reliable sources, and no representations are made by our firm as to another party's informational accuracy or completeness.
• 14:38
  SPEAKER_00: All information or ideas provided should be discussed in detail with an advisor, accountant, or legal counsel prior to implementation.