Financial Advice Column
Dear Liz: After my mother passed away in 2015, I inherited her Roth IRA and have been taking the minimum distributions based on my age each year. My spouse is the primary beneficiary of this inherited account. However, I’m curious—what happens if she passes away before me? Can she roll it into her existing Roth IRA, as is typical with spouse inheritances? Or are there special rules since it will be considered a “double inherited” Roth IRA?
Answer: Recent changes have essentially removed most stretch IRAs, meaning beneficiaries can’t spread distributions throughout their lifetimes as they used to. For IRAs inherited after January 1, 2020, the general rule is that they must be fully distributed within 10 years.
This likely applies to your spouse as well. There are specific provisions that allow a spouse to treat an inherited IRA as their own, but according to Mark Luscombe, a principal analyst at Wolters Kluwer Tax & Accounting, this only applies when inheriting directly from the original account holder.
There are some exceptions. For instance, if your wife is disabled or has a chronic illness, she might be able to take distributions over her lifetime.
Otherwise, she would need to withdraw from the account within that 10-year window. Even though many inherited IRAs require annual distributions, a Roth IRA doesn’t have that same requirement. Since the original holder didn’t need to start taking distributions, your spouse wouldn’t have to distribute annually. However, the account must be fully distributed by the end of the 10-year period, as Luscombe explains.
Dear Liz: I’m in my late 50s, married, and I find myself quite unprepared financially since I’ve been a stay-at-home mom for a while. Now that I work almost full time, my employer doesn’t offer a 401(k) or any profit-sharing. I’ve started contributing $8,000 to my Roth IRA as a catch-up amount. What other steps can I take to make up for lost time?
Answer: While you can’t retroactively earn the compound interest you missed out on, you can make smarter choices moving forward for a more stable retirement.
One of the key decisions involves how you and your spouse handle Social Security. It’s usually beneficial for your spouse to wait until age 70 to claim it, maximizing lifetime benefits and securing the best possible survivor benefits. If you outlive your spouse, that additional income can be quite significant. Consider reading “Get Yours,” a strategic approach to Social Security, authored by Lawrence J. Kotlikoff and Philip Moeller. Make sure to get the updated 2016 version; earlier editions reference strategies no longer valid due to legislative changes.
Another viable option for catching up is to delay retirement. This gives you additional years to work and earn. Look for employers that offer substantial 401(k) matching to enhance your retirement saving. Contributing to a workplace plan can yield more benefits compared to just a Roth IRA.
You and your spouse might also benefit from consulting a fee-only financial planner who can provide personalized advice on your financial situation.
Dear Liz: I was recently helping an older couple who were anxious about capital gains tax when selling their home to move to assisted living. I suggested the option of paying in installments or even renting. Another alternative could be considering a reverse mortgage to free up some capital.
Answer: With a reverse mortgage, the loan must be repaid if the borrower dies or sells the house, so it’s not a decision to take lightly. If one spouse is staying in the home while the other moves, this might be workable, but if both are considering assisted living, it might pose challenges.
A home equity loan or line of credit could be a feasible route, provided they have a strong credit history, sufficient income for payments, and a willing lender. Consulting with tax professionals or fee-only financial planners can help clarify the best options available.
