Widow’s IRA Choice

WHEN A HUSBAND dies, his widow inherits his IRA. Somewhere in the paperwork of the months that follow there is a decision to make, and nobody presents it to her as one. She can take the account as her own, or she can leave it titled as inherited.

Taking it as her own means filling something in. Leaving it means doing nothing, and the IRS tells custodians they may assume that is what she wants. So the account sits where it is, at the same firm, holding money the household always treated as joint, and the decision gets made by nobody.

It is the more expensive of the two. Not by a little.

Two Tables

Every year, a required minimum distribution, or RMD, has to come out of the account. The amount is the balance divided by a number from an IRS table, and there are two tables in play here.

Beneficiaries use the Single Life Expectancy table. Owners use the Uniform Lifetime table, which spreads the money over a longer period and therefore asks for less each year. That is the whole mechanism, and it is worth about a third of the annual bill.

Take a widow of 76 with $480,000. Left titled as an inherited account, she owes $34,043 that year. Had she taken the same account into her own name, she would owe $20,253.

Same money, same woman, same birthday. The difference is which box got ticked in the months after the funeral.

It Does Not Happen Once

That gap is not a one-year event. Run both versions forward 10 years, same account, same growth, taking exactly what is required and nothing more.

The inherited schedule forces out $374,306 over the decade. As owner, $246,281.

She pays about $30,600 more in federal income tax getting there, and reaches 85 with roughly $171,000 less still inside the IRA.

She has not lost that money. She has been made to take it out early, pay tax on it sooner, and hold it somewhere less sheltered for the rest of her life. That is a slower kind of damage than a penalty, and a larger one, because it renews every January for as long as she lives.

A Floor, Not a Ceiling

The usual objection to taking the account as your own is that it locks the money up. It does the opposite.

A required distribution is a floor, not a ceiling. She can take more in any year she wants it, for any reason, and nobody asks why. What she leaves alone stays sheltered and keeps compounding.

The lower figure buys her the choice. The higher one makes it for her, every year, whether the money is needed or not.

One Case Runs the Other Way

There is a real exception, and it matters enough to state plainly.

Money paid out of an inherited IRA escapes the 10% early-withdrawal penalty at any age, because the IRS exempts what is paid to a beneficiary on account of the owner's death. Take the account as your own and you are back under the ordinary rules.

So a survivor who is young enough that an early withdrawal would be penalized, and who expects to need the money, has a genuine reason to leave the account exactly where it is. That threshold is 59 and a half.

For most couples already retired this will not apply, and the rest of the article governs. Where it does apply, it outranks everything above.

Nobody Will Prompt You

I wrote recently about the letter that never comes. A custodian has to tell an IRA owner what must be withdrawn each year, and owes an inherited account nothing at all.

So the choice decides more than the size of the bill. Take the account as your own and the letter starts arriving, every January, for the rest of your life. Leave it as inherited and you are on your own to remember the RMD.

The branch that requires no paperwork is therefore both the more expensive one and the quiet one, and those two facts feed each other. The option that costs more is also the one that removes the annual nudge that might have made you reconsider it.

Decide It Before You Have To

None of this is hard to work out. It is hard to work out in the eight weeks after a funeral, which is exactly when it gets decided, usually by default.

If you are married and you both hold IRAs, settle it now, while it is hypothetical for both of you.

Talk through which of you would be likely to need the money soon after the other died. That is what the 59-and-a-half question really asks, and it is a conversation about your circumstances rather than about tax tables.

Then decide which way the survivor should go, write it down, and put it with your trust, your will and the beneficiary designations, where a survivor or an executor will actually come across it. Tell whoever else needs to know that it exists.

Look at it again as either of you nears the age your own distributions must begin. That is 70 and a half if you were born before July 1949, 72 if you were born between then and the end of 1950, 73 if you were born between 1951 and 1959, and 75 if you were born in 1960 or later. It is the birthday that makes the whole question live.

The paperwork will not choose for you. It will simply do nothing, which is a choice, and on these numbers it is the wrong one for most people who make it by accident.

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John Urban is the founder of RetireSmartIRA, a retirement tax-planning app. Earlier, he founded GT Nexus, a supply-chain software company acquired by Infor in 2015. He lives in Northern California with his wife, Kathy, and enjoys time with family, travel, reading, Bay Area sports, and the occasional deep dive into the fine print of the tax code.

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