I was the beneficiary of my late wife’s IRA and 401(k) — but I want our kids to get the cash. Do I still have to take mi

Losing a spouse is an incredibly difficult experience as it is. Untangling their finances after they die only adds to the strain — particularly when it comes to retirement accounts.

Imagine Stan, a 70-year-old widower who inherited his 71-year-old wife’s Roth IRA and her 401(k) when she passed.

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He spent decades building his own nest egg and wants to use his own investments to cover his day-to-day expenses while letting his wife’s accounts grow as a future gift to their two children.

But there’s a catch. At age 73, you are obligated to withdraw a minimum amount — required minimum distributions(RMDs) — from your retirement accounts every year.

Stan can’t get a clear answer on whether this rule will apply to him when it comes to his late wife’s accounts. He wants to leave them untouched.

He needs to know in order to determine how to manage his own retirement savings and ensure there’s sufficient money left in his wife’s accounts for their adult children down the line.

Let’s cut through the noise and get clear on the rules.

Roth IRAs and required minimum distributions

Roth IRAs are not subject to required minimum distribution rules until the original account owner dies — which is important in Stan’s case.

However, Stan’s wife named him sole beneficiary of the account. As the surviving spouse, he has some different rules than a typical beneficiary.

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Stan’s wife’s 401(k) died at age 71 before reaching RMD age, so distributions won’t start for a couple years when she would have turned 73.

If Stan keeps his wife’s Roth IRA as an inherited account, he can do one of two things.

He can delay required minimum distributions for two years until the year his wife would have turned 73.

Or he can follow the 10-year rule, which holds that he must empty the funds of the IRA by the 10th year following his wife’s death.

There’s a third option:

To avoid minimum distributions altogether, he could roll over the funds into his own Roth IRA account to sit and grow tax-free – provided he is the sole beneficiary. (1)

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If Stan’s wife had left her accounts to their adult children, the children would have to withdraw the required minimum distributions based on their own life expectancies or follow the 10-year rule.

Following the rules to avoid penalties

It might be a good idea to consult with a financial advisor on the tax and financial implications of various scenarios in this case.

If Stan wants to keep the inherited accounts as is, he needs to stay on top of deadlines and his late wife’s RMD schedule. Working with a financial advisor or a custodian to most accurately calculate what needs to be withdrawn each year is a smart step.

What is withdrawn is taxable income: Failing to report it (or reporting too much or too little) may subject Stan to tax penalties.

If he fails to follow the rules, Stan could not only be required to withdraw the required amounts from both the inherited 401(k) and Roth IRA, but pay a hefty fine of 25% of the required withdrawals to the IRS.

If he accidentally misses a required withdrawal, he can report the amount owed on his federal tax return and submit form 5329 and request a penalty waiver before taxes are due. This could lower the penalty.

How will he know how much to withdraw?

Typically, the IRS will calculate the required minimum distribution on total account balances, your age and life expectancy. Be aware that the amount you’re required to withdraw will change each year as your life expectancy also changes. (2)

The easiest way for Stan to manage this situation may be to roll his late wife’s 401(k) and Roth IRA investments into his own accounts. That way, he won’t have to worry about remembering her deadlines as well as his own when it comes to required minimum distributions.

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Fidelity (1); Merrill (2)

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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