Q. Iím in a dilemma. My husband died recently, and I inherited his 401(k) Retirement Plan and some life insurance (I am the only beneficiary). I understand that as his wife, I can rollover the 401(k) to my IRA. The only problem is, if I do this, then Iíll have to pay a 10 percent penalty if I need to take some money out of the IRA since Iím 55 years old (under 59-and-a-half IRA rule). I really think Iíll need some of that money to help with my expenses. What can I do?
A. Iím so sorry to hear about your husband. I know the financial burden is just part of the loss you feel. Believe it or not, you will start to feel better over time.
As far as the 401(k) Retirement Plan goes, you are right, you can roll that over to your IRA. You could also just take a lump sum distribution of the 401(k) but you would have to pay income tax on this, or use what is called the five-year rule and still pay a lot of income tax. Or you could roll that 401(k) into a Beneficiary IRA (under your social security number but with your deceased husbandís name also in the title). For example, the title could be something like John Smith deceased (6-6-12), IRA FBO Mary Smith.
If you choose to set up the IRA in this way, you can take money out of a Beneficiary IRA as the beneficiary. You would have to pay normal income taxes on any withdrawals, but no penalty. The 10 percent penalty does not apply to beneficiaries. You can take any amount of money out of this account any time you want. On the other hand, if your husband was younger than 70-and-a-half when he died, you will not be required to take money out of the Beneficiary IRA annually until he would have been 70-and-a-half. If he was older than you, once you reach age 59-and-a-half you can switch this Beneficiary IRA to your own IRA, and still not have that 10 percent penalty.
There are other details here, so I recommend that you confer with your financial planner and your tax professional on this to make sure you are in compliance with the IRS rules.
Q. Iíve been a widower now for four years and I recently have been dating a woman I like very much. But it seems that my children (all adults with their own families) are not in favor of us getting married. I guess they mean well, but I think they are concerned about their inheritance. I want my money for my use. Iím not ready to give anything away to my children. I might need the money for me, but I am in favor of my children (and grandchildren) inheriting from me. If I do get re-married, I know about pre-nuptial agreements but Iím not so sure I want to go there. What else should I consider?
A. Itís hard to keep everyone happy (some will say itís impossible).
Hereís an idea. You can consider buying life insurance for your children to inherit (you name your beneficiaries on life insurance) -- at your death the insurance proceeds go right to the named beneficiaries. It doesnít go through your will, doesnít go through probate. It goes right to whomever you name as your beneficiary(s). As you know, the life insurance amount is many times greater than the amount of the premium you pay.
This way, you can live your life as you want, and your kids will still inherit from you (income tax free, by the way). Depending on the size of your estate, you may want to set this up so itís not subject to Federal Estate Tax and State Inheritance Tax. You should work with your financial planner to see that this is set up the way you want.
Robert S. Pennartz is a Certified Financial Planner Practitioner at the Financial House, a Registered Investment Advisor, in Centreville, Del. He lives in Pocopson Township with his wife and children. He is a registered representative offering securities through Lincoln Financial Securities Corporation, Member SIPC. Lincoln Financial Securities Corporation and The Financial House are not affiliated. Lincoln Financial Securities Corporation and its representatives do not offer tax or legal advice. You should consult your individual tax or legal professional regarding your individual circumstances.
(Do you have a question about your financial affairs? Financial planning consultant, Robert S. Pennartz, CFPģ takes calls at 1-302-654-5556, extension 138 or 1-800-366-0632, extension 138. A selection of these questions and Pennartzís responses are published in this column. Anonymity is assured.)