IRA transfer to survivor spouse

[titabobbie]

  I inherited my husband's IRA retirement upon his death.  I am liable for Federal taxes if I transfer this to   my  IIRA retirement?  

[Tonster521]

@titabobbie As Gail posted, you can transfer your deceased spouse's IRA to your IRA. As long as the transfer is coded correctly, there are no federal taxes due on the transfer. However, tax laws covering inherited IRAs are complicated. So, you may want to seek help regarding how your subsequent distributions will be taxed and how your beneficiary(s) may be taxed upon your death. There are a number of strategies that, depending on your other taxable income, may be beneficial to you and/or your beneficiary(s). 

First, if your spouse died in 2024, this is the last year that you can file Married Filing Jointly. This is important because your Standard Deduction for MFJ in 2024 is $29,200 versus $14,600 for Single. Seniors over age 65 can deduct another $1,550 in 2024. So, if both you and your spouse already attained age 65, you can deduct another $3,100 in 2024 for a total Standard Deduction of $32,300. This is tax free money not just tax deferred. So, make sure you are, at least, receiving, at least $32,300 in taxable income. To reach that threshold, you may need to elect a distribution from your IRA or your inherited IRA should you decide to just claim your spouse's IRA as the beneficiary of an Inherited IRA. There are advantages/disadvantages regarding Required Minimum Distributions (RMDs) depending on your ages. Another concern is that the tax brackets allow greater taxable income for MFJ. So, for 2024, the 12% tax bracket for MFJ is $23,201 to $94,300 whereas for Single it is $11,601 to $47,150. If your taxable income exceeds those brackets, you then move to the 22% tax bracket for any taxable income above those amounts. Currently, the Standard Deductible and Tab Brackets are adjusted for inflation. However, that may change when the current tax rules expire after 2025.

So, if your spouse died in 2024, this may be an optimal time to rake advantage of the MFJ tax rules and elect a partial distribution from any of your IRAs to attain the appropriate amount of taxable income. Of course, if your taxable income is already over $94,300, then you are paying federal taxes at the 22% tax bracket threshold and deferring taxable income makes perfect sense. My suggestion is to find someone who can provide strategic tax advice for your present situation and going forward. 

[DavidV935]

 How about an article dedicated to seniors who have a traditional IRA and want to know how to pass that to their adult children (now in their 40s and 50s) in such a way that minimizes the tax consequences while maximizing the amount their beneficiaries receive. That requires two types of actions which does not include conversion to a Roth IRA.

[GailL1]

Taxes are deferred until distribution - just make sure it is coded as a transfer or rollover - best to do it between institutions so that your hands aren’t involved at all.

How you set it up is up to you if you are the spouse - and when the death of the account holder happened - before 2020 or after 2020. (see the IRS link below)

If there is no need to fancy up the distributions due to one’s tax situation - you can just combine it into your own IRA and take the distributions when required or when needed from all of it, combined.

IRS.gov - Retirement Accounts - Beneficiary

[DavidV935]

 I've discovered over this past year that neither estate planning attorneys, financial advisors, nor accountants understand the complete picture of the financial and tax consequences for those who inherit an IRA, 401(k), or government Thrift Savings Plan. Both boomers and their adult children need better advice and I wrote an article targeting those inheriting these tax-deferred accounts. I just got an AARP Advocacy email promoting requiring all financial advisors be fiduciaries, but AARP is shooting in the dark. and AARP Money writers don't understand the issues either.

[GailL1]

@DavidV935 

There isn’t really a problem transferring it to a surviving spousal - there are special IRS rules for passing it along to a surviving spouse.  If it is transferred correctly - meaning, no distribution  - then the surviving spouse gets it and from then on it is considered theirs - and then all the rules of distribution applies to them and their whole IRA - their own + whatever they receive as a distribution.  So any tax consequences apply to whatever is distributed not transferred or rolled over - to the inheriting spouse, considering their entire Traditional IRA, whether their own or inherited.

The main difference in opting to give a Traditional IRA to someone other than a spouse is the rules on when the inherited one has to be distributed.  Uncle Sam wants their part of this tax deferred retirement savings and they don’t want to wait to long for it either.  So separate rules on when distributions have to start apply.

If you have a different plan, please, let us hear it so we can scrutinize it.  I’m all ears since I am the only one remaining in the spousal union now - so mine has no other place to go but to a NON-spousal beneficiary.

It does have to be legal - I’m all ears.  

[DavidV935]

 I've done extensive research into tax law on inherited traditional IRAs for non-spouse beneficiaries. I would love to share what I've learned with you Gail, but don't know how through this forum. I've written an article about it and shared it locally with other boomers (I'm a boomer) and they suggested I submit it to AARP Magazine to share what I've learned with a broader audience. I just did that about an hour ago.

[GailL1]

@DavidV935 

Would it be something other than what is covered in this Smart Asset article?

SmartAsset.com - updated 06/03/2024 - How Do I Avoid Paying Taxes on an Inherited IRA? 

[DavidV935]

 Yes... that article is too generic to be of help and it doesn't point the reader to a path to follow. When I submitted my article to AARP Magazine, this is what I told them in the email:

AARP Magazine Editors,

Because I received different (and often conflicting) advice from estate planning attorneys, financial advisors from different investment firms, and accountants, I spent over 6 months doing extensive research into how best to transfer my relatively large traditional IRA to my adult children after I pass if I’m the surviving spouse or after my spouse passes. Many boomers with whom I’ve shared what I learned have suggested I share this knowledge with AARP members through the AARP Magazine because this is relevant to both generations who are AARP members – those bequeathing a traditional IRA and those who might inherit one, hence this submission.

To write this article, I used the following authoritative references in addition to reading myriad articles online:

1) IRS Pub 590-B, Chapter 1, Traditional IRAs;

2) 26 CFR Part 1, Section 401(a)(9) - part of the Internal Revenue Service code;

3) 5 CFR Chapter VI, Part 1651 - guidance for beneficiaries of federal government Thrift Savings Plan accounts.

4) Tax-law interpretation meeting at an IRS Taxpayer Assistance Center.

I also built a few financial models in Excel to predict IRA balances over time and effect of RMDs, incorporate various growth rates in the inherited IRA, and visualize tax consequences to beneficiaries using a variety of scenarios.

[sktn77a]

There are plenty of fora that you can post such an attachment, for example: https://www.bogleheads.org/forum

and then post a link to it on this forum.

[DavidV935]

 Thanks for that tip! I haven't heard of that before your post.