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IRA Gotchas – Watch Out for the Rollover!

A larger share of people's savings is winding up in IRAs—even as estate-tax rules are getting trickier and the markets are growing more volatile. All of this is making life more complicated for widows and widowers, and could cause them to make significant mistakes with their money.

Surviving spouses have a number of pressing issues to consider after the death of a spouse. It always has been that way. Now, however, their lot is even more difficult as more is at stake, to include mistakes regarding IRA gotchas.

Unfortunately, not giving due attention to an inherited IRA can be a very costly mistake.

The problem is the IRA rollover penalty. The Wall Street Journal rates it as one of the biggest mistakes a surviving spouse can make. The standard advice is to roll over a decedent’s IRA into your own IRA. However, especially in light of current events, this might be a rule of thumb to avoid until you’ve weighed your own options.

IRAs are tricky and getting increasingly trickier. Not to mention the reality that an ever increasing amount of personal wealth is being held and passed down in the form of IRA investments at this time of incredible market volatility. If you are at or over age 59, then an IRA rollover may not be a bad idea (since you’ll have access to the IRA funds shortly).

Nevertheless, a great many spouses will receive an IRA before that age and it’s not usable wealth to cover all sorts of new expenses, unless you pay the 10% to make early withdrawals. Instead, the IRA could simply be inherited and remain in the name of the decedent. On the downside, this approach would require taking regular and taxable withdrawals on the account right now.

In general, a great deal of thought should go into how to best “inherit” an IRA. The Wall Street Journal article goes on to mention a few other survivor mistakes, along with some interesting statistics about IRA rollovers.

You can learn more about estate planning and elder law issues on our website. Be sure to sign up for our complimentary e-newsletter to stay abreast of issues like these that could affect you, your loved ones and your estate planning.

Reference: The Wall Street Journal (November 12, 2011) “Survivors’ Biggest Mistakes

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