Can I open a Traditional or Inherited IRA with the lump sum payout from my husband's defined benefit pension plan?

[specialdb]

I believe as a spouse I am allowed to roll the funds into an IRA but I want to be sure I open the right IRA to avoid taxes and penalties.

[dmertz · Accepted solution]

By law, the payer is required to provide you with a statement listing your rollover options prior to making the distribution.

The lump-sum payment from your husband's defined benefit plan can be rolled over to either a traditional IRA of which you are the owner, or to an inherited IRA titled in your husband's name as deceased and you as beneficiary.  However, a rollover to the inherited IRA can only be done by direct rollover, not by making a distribution paid to you which you then roll over within 60 days.  If you have already received a distribution paid to you, your only option is to roll the distribution over to an IRA in your own name, not an inherited IRA.

The choice of which one to do generally depends on your age, whether or not you will need to take distributions from the IRA before you reach age 59½, and whether or not your husband was younger than you.  Distributions that you make before age 59½ from a traditional IRA owned by you are subject to a 10% early-distribution penalty unless an exception applies, while distributions from an inherited IRA are not subject to penalty at any age.  However, beginning the year following the year of the death of your husband or the year that your husband would have reached age 70½, whichever is later, you are required to take minimum distributions from the inherited IRA.  If you initially (directly) roll the money over to an inherited IRA, you can later roll the money over to an IRA in your own name to potentially reduce the amount of required distributions (RMDs) to those required as owner rather than as beneficiary.  Also, if you fail to make an RMD as beneficiary, the inherited IRA defaults to being an IRA owned by you instead.  One other consideration is that if you have the money in an inherited IRA when you die, your beneficiaries would be successor beneficiaries who would be required to continue your RMD schedule.  If you instead have the money in an IRA with you as owner, your beneficiaries would be able to calculate RMDs based on their own life expectancies.

If you are over age 59½ and your husband was older than you, you would generally want to roll the money over to a traditional IRA in your own name so as to minimize required distributions and to ensure that your beneficiaries would be able to use their own life expectancies for RMDs.

[specialdb]

Thank you for your response.  I neglected to mention that we had both retired prior to his death and were the same age at retirement (58).  We were both 63 when he passed.  I hope these facts don't change my options.

[dmertz]

Under the circumstances, I see no benefit to directly rolling this over to an inherited IRA, only disadvantages.

By rolling this to a traditional IRA in your own name, it will become treated as if it was always your own IRA, allowing you calculate RMDs as owner rather than the higher RMDs as beneficiary when you reach age 70½ and to name beneficiaries who will be able to use their own life-expectancy for determining RMDs.

[DDollar]

Yes, as a spousal beneficiary you can roll over the account into an existing IRA, qualified plan, annuity plan, tax-sheltered annuity plan, or a governmental plan, or by creating a new IRA account.  Contributions can be made to increase the balance of the new account that has been set up, and the Required Minimum Distributions (RMD) will be delayed until you (the spousal beneficiary) reach the age of 70½. Any withdrawals which are made prior to the age of 59½ will be subject to the 10% penalty tax unless they are rolled into another qualified plan within 60 days (or are made pursuant to one of the exceptions to the 10% excise tax).

For more information see the following IRS publication: Required Minimum Distributions for IRA Beneficiaries.