This article has a lot of information about the tricky subject of distributing IRAs. Since the METAR group has many older members (and I need to post only a snip to stay inside copyright regulations) I will post only about the “widow’s penalty.” But there’s a lot more in the article.
Tackling Retirement’s Tricky Tax Questions
IRA and 401(k) tax questions never end, so here are answers to the latest ones from our readers
I’ve now realized my wife will get hammered on taxes if I leave my large traditional IRA to her. Can I leave it to other heirs?
Yes. This question refers to the “widow’s penalty,” which many aren’t aware of. It arises when one spouse dies and the survivor typically must switch from married, filing-jointly tax status to single-filer status.
Some surviving spouses even do Roth conversions in the year of the spouse’s death to benefit from married-filing jointly brackets before their filing status changes. …[end quote]
If you anticipate this issue, you can take action while both spouses are still alive.
Gradually convert a Traditional IRA or 401(k) to a Roth over a period of years, paying the tax in a lower tax bracker.
Leave all or part of a traditional IRA or 401(k) to other heirs. Make sure your spouse has enough to live on and doesn’t need the IRA money.
Consider making a qualified charitable distribution (QCD), also known as an IRA charitable rollover. Beginning in 2023, the Consolidated Appropriations Act of 2023 expands the definition of QCDs to include one-time distributions to create life income plans, specifically charitable gift annuities (CGAs) and charitable remainder unitrusts or annuity trusts (collectively, CRTs). This new type of QCD is a one-time maximum transfer of $50,000 to a qualified CRT, or in exchange with a charity for a CGA. Therefore, the new QCD can only be done once during the lifetime of the IRA owner. This is a way to generate income during life while reducing the IRA distribution after death (since it goes to the charity). Make sure that you won’t need the lump sum used to fund the annuity since you won’t get it back. (This is true of all annuities.)
Since Wendy has broached the “lots of us are old folks” topic, let me add something:
Do NOT put your heirs through unintended estate hell after you die by neglecting to simplify your bank and investment accounts with an eye to
Keep them manageable as you age, however you want them manageable,
Make certain that the process of inheriting them is EASY and like GREASED LIGHTNING, rather than the bank/broker’s default which is almost impossible to remove the money without enormous time and expense.
Mom’s joint safe deposit box held with her predeceased husband (my good and kindly step-father) has taken my brother and I three years to access.
Actually consider doing a “before I die I just want to check that everything is arranged to make it easy for my heirs” test drill, talking it over with an actual human at brokerage or bank.
Most sincerely, and with hopes we all live long and happily,
So you’re saying setting my wife as primary beneficiary is not enough?
[EDIT] I’m going to add that when we setup the revocable trust for the two of us, the lawyer had me keep my wife as primary beneficiary on the accounts, and have the trust as the secondary beneficiary. (The trust is primarily in case we both die, how does our child get assets, when, and who cares for her). [/EDIT]
Related to this topic, I have a “letter of last resort” in the safe that my wife knows exists. It has contact information for my boss (who is out of state), for Corporate HR. This way she can get life insurance pay-out, Cobra, access to 401k, etc. This letter also states all the life insurance policies on me, all financial accounts (she always interacts with our big account, but not with my 401k account, not with my RSU account). Recommendations on what to do with investments (usually to de-risk from what I do). An explanation of how long this money will likely carry her and the daughter, to ease some fears.
The main account I had to deal with was an account Dad long ago set up as a Trust for my Mom with an old brokerage house once honorable but now definitely faded. All business with them had to be done by mail, email, or (if you got real lucky) phone. Only US mail worked reliably. Their offices were in New Jersey, and I was in Mexico. They required medallion notarization of my certification as Trustee, and of my orders as to disbursement.
The safe deposit box was entangled by its being in both my mother and step father’s names. That took seven months of tracking down another death certificate as he had died long ago.
A trust is definitely NOT a default. I have long held the opinion that a trust often complicates the process; especially if you are simply wanting to pass money to a spouse/kids and there are (edit: no) extenuating circumstances. TOD/Bene on an individual or joint account would have make that process very easy.
SD boxes are another matter and I would always recommend a joint owner(s) on those or clear instructions in your will as to how you want the assets in the box distributed.