Q. My neighbor is newly widowed and she is hesitating to roll her dead husband's IRA into her own. I think she isn't thinking clearly as a consequence of his passing on Valentine's Day of this year. It got me thinking though. Who WOULDN'T roll their spouses IRA into their own?
A. You may be right that her grief is making it hard for her to make decisions. Grief is powerful. I don't know how I would get along without my wife Kelly.
I am assuming it was a traditional IRA here. The rules for Roth IRAs differ. She doesn't need to rush into rolling it or not rolling it. If he died after April 1 of the year after the year in which he turned 70 1/2, he was subject to Required Minimum Distributions (RMD). Her deadline is Dec. 31, 2013 by which date she will need to withdraw his RMD for 2013 if he hadn't already done so no matter what she decides to do with the account otherwise. The penalty for failing to take the RMD is 50% of the shortfall, so this isn't a deadline to miss. If he were under 70 1/2, RMD only comes into play beginning in the year he would have turned 70 1/2.
If it is not rolled it is typically registered as something like "IRA of Wife as spousal beneficiary of Husband" but the exact wording can vary from firm to firm. If it is rolled into her name, it is treated as if it were always hers and she can do as she pleases. So, why would a surviving spouse not roll it into their own IRA? I will give you two examples both driven by the survivor's age.
If she is younger than 59 1/2, with a spousal inherited IRA, she could withdraw funds without paying a 10% penalty. If she rolls it into her own, the exception for distributions due to death doesn't apply because the IRA is treated as if it were always hers. Consequently, many young survivors will keep the IRA as a spousal inherited IRA until they are certain they won't need to make withdrawals before 59 1/2.
If she is older than her deceased husband, rolling the IRA into her own means those funds would be subject to RMDs based upon her higher age. This can start RMDs earlier or increase the RMDs because RMDs increase with age. The older the beneficiary, the more dramatic the impact.
Q. Last week I asked the brokerage that has my IRA to directly write three gift checks from my IRA rollover. I'm 71 and a half. They did issue the checks but they tell me it will be reported as normal (taxable) income. It will be up to me to itemize the gifts on my tax return. I have read that if the checks are written to the charity directly, the funds would not be taxable. Can you please advise me on this? — A.W.
A. It would be my pleasure. They are correct that it is reported to you as ordinary income on Form 1099-R. They are incorrect using the term "itemize.” You don't need to itemize to make these Qualified Charitable Distributions (QCD) tax free. Let's use an example.
Say you withdrew $40,000 gross to spend in addition to the QCD checks total $10,000. Your 1099-R would show $50,000 but you will report only $40,000 as taxable on your 1040. You can see how to do this on lines 15a & 15b on the 2012 Form 1040. The 2013 Form 1040 should be similar. Enter $50,000 on Line 15a in the center of the first page of Form 1040 but only $40,000 on line 15b in the far right column. Many tax preparers suggest writing "QCD" next to line 15b to indicate why 15a and 15b aren't identical. The $10,000 in QCDs are counted toward your Required Minimum Distribution (RMD) for 2013 even though they are not taxable.
You can see this deduction comes off the top or "above the line" as they say and comes before ever getting to Schedule A itemization. If you do itemize there is some value of the QCD but it can be greatly diminished. See my Q&A column from January 18.
Q. The thing that troubles me most is that — as I now understand it — I cannot make a change in my IRA more than once per year. If you have an answer somewhere I'd like to get that off my mind. — M.G.
A. MG, I suspect that what you heard is that you cannot make an IRA rollover more than once a year. You can however, make other changes. This is an advantage to the IRA structure versus other forms of retirement plans.
You can change your investments, your beneficiaries, frequency of contributions, the amount of your contributions (subject to limits), the frequency and amounts of distributions (subject to a few rules), and even what company holds your IRA account.
The term "rollover" is used to describe a certain method of moving money from one retirement plan or IRA account to another. A rollover typically comes into play when an IRA is moved from one company to another or from one type of account to another. The check is made payable to the owner, "MG" in your case. If you deposit that same amount into the new account within 60 days, a rollover is deemed to have occurred and no taxes are due.
What we normally prefer is a "direct rollover" aka a "trustee to trustee transfer" whereby the check is made payable to "XYZ Financial for the benefit of the MG IRA" or something similar. By using this method, there are no worries about tax withholding, checks clearing in time, accounting on your 1040 or not being able to move the money within the year. There are no limits to the number of such direct transfers that may be executed in a year.
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