Written by P. Mark Accettura

Over the last two decades, IRAs, 401ks, simplified employee pensions (“SEPs”), and other account-based retirement plans have gained widespread acceptance and popularity. For the most part, they have come to replace traditional employer-provided monthly pension benefit plans. Such account balance plans can easily be transferred from employer to employer (or to an IRA), and are therefore better suited to our mobile workforce. The move to account based plans has also shifted the responsibility for retirement savings from the employer to the employee.

The result of the last twenty years of employee-based retirement savings is that IRAs, 401k and other retirement accounts constitute a significant portion of the net worth of most Americans. If neither you nor your late spouse is eligible for a pension benefit from a previous employer, you might find that, other than social security, your retirement accounts are the sole source of your retirement income. Therefore, how you manage, invest, and take distribution from your retirement accounts will be critical to your personal financial security.

At death, your late spouse’s retirement accounts pass to the named beneficiary on each account. Federal law requires that qualified pension and profit sharing plan participants (but not IRA, SEP, or 403b owners) name their surviving spouse as the primary beneficiary. A beneficiary other than the surviving spouse can be named in such plans only with the written consent of the spouse. Although IRAs, SEP plans, and 403(b) plans do not require that one’s spouse be named as primary beneficiary, it is nonetheless likely that your late spouse named you as beneficiary. As beneficiary, several options are available to you.

You may:

1. Take a distribution of the entire account and then roll it over into your own IRA.
2. Leave the money in your late spouse’s account and access the account as needed.
3. Take a lump sum distribution of the account and elect “10-year averaging”.
4. “Disclaim” the interest.

What is appropriate for you will depend on a number of factors including the size of your late spouse’s retirement accounts, your late spouse’s age at the time of his death, your age, and your need for income. The rules pertaining to retirement account distributions are extremely complex.

Although the discussion that follows is likely beyond the comprehension of most readers, it is too important to leave out of this book. You will need the advice of a competent tax attorney, financial advisor or CPA to assist you in the subject matter of this chapter. Please be patient, and learn what you can.

THE STRETCH PHILOSOPHY

Except in the case of Roth IRAs, distributions from retirement accounts are taxable to you as ordinary income. Generally, sound tax advice dictates that you accelerate your deductions and defer taxable income.

As you develop your financial plan (Chapter Five), you should blend taxable and non-taxable sources of income to allow you to live the lifestyle to which you became accustomed when your spouse was living, while at the same time minimizing income tax. If you have significant alternate sources of income, you may not need to take immediate distributions from your retirement accounts.

With a little planning, you can postpone retirement distributions until you are 70 ½ (see Required Minimum Distributions below). With artful planning, you can “stretch” retirement distributions over your life as well as your children’s lives. Of the four options described above, the best potential for postponing distributions can be achieved by electing Option 1 and rolling your late spouse’s retirement accounts over into your own IRA.

ROLLOVER

A “roll over” is a distribution of your spouse’s entire interest in the retirement account (IRA, etc.), that within sixty days is deposited into your own IRA. Rollovers are tax-free. Only a surviving spouse can roll over a deceased participant’s interest.

Once rolled, you become the owner of the rollover account and therefore are entitled to name a beneficiary of your own choosing. Of the options available, it is almost always best to roll your late spouse’s IRA, 401k, or company retirement plan into your own IRA. Rolling over allows you the greatest investment and distribution flexibility.

By rolling over, you are in complete control of the investment house, investment advisor, and investment mix of your new IRA. With your own IRA, you will have a greater ability to defer distributions both during your life, and to your beneficiaries after your death. The flexibility of your own IRA is in marked contrast to leaving your spouse’s account in his former employer’s retirement plan.

Such plans often offer limited investment options, minimal financial planning advice and restrictive distribution options. The only time you should not roll your spouse’s account over is if you are younger than age 59 ½ and need immediate access to the funds.