Joe Schmo and Mrs Schmo and the Inherited IRA

by LAS

Joe Schmo can leave his IRA to your surviving spouse (Mrs Schmo) or child (Johnny Schmo), no problem. But doing it right can avoid a big tax bite. This is according to Jane Bryant Quinn, so if your local finance advisor is at all confused over how to handle this, tell him that.

Mr Joe Schmo has a very fine IRA, but one day he kicked the bucket. Fortunately he designated Mrs Schmo as his beneficiary.

Mrs Schmo has to put this IRA in her name. This is called retitling. With a traditional IRA, she has to leave the money alone until she reaches age 70 and a half, when the law requires her to start making withdrawals. (NOTE: With a Roth IRA, you can keep money you do not need in the IRA for the next generation.)

Mrs Schmo is under 59 and a half, so this is how she should re-title this IRA: “Joe Schmo IRA (deceased MO-DAY-YR) for the benefit of Jane Schmo, beneficiary.”

When Mrs Schmo reaches 59 and a half, she ought to re-title it once more, this time in her own name. This has the advantage of allowing her to let the money accrue value until she need it, or rather when she is required to make withdrawals at age 70 and a half.

Now, let's say that a parent leaves the balance of an IRA to an adult child. The child also has to re-title the IRA. Joe Schmo leaves his IRA to his only child, Johnny Schmo, so Johnny has to re-title it like this: “Joe Schmo IRA (deceased MO-DAY-YR) for the benefit of Johnny Schmo, beneficiary.” (if there are several children, each one should re-title his or her share of the IRA)

Note that inherited 401(k)s can also be similarly retitled as an inherited IRA.

There is a book out there on this specific topic, “Retire Secure! Pay Taxes Later” by James Lange.