Retirement plan distribution options for surviving spouses under age 59 1/2.

• Author: Derzon, James A.

A real dilemma exists when a surviving spouse is faced with the decision of handling the retirement plan assets of the deceased spouse, especially if a substantial amount is involved. Some of the questions that the survivor might ask include: When am I required to take distributions from the plan? When should I take distributions from the plan? Should I take a lump-sum distribution or installments? Should I transfer the retirement plan funds into an individual retirement account (IRA) instead? What are the tax consequences of one decision versus another? How can I make this money last? How can I meet my financial needs?

Although the answers to these questions depend on each individual's circumstances, there is a beneficial planning option for "young" surviving spouses (i.e., those under age 59 1/2).

If a lump-sum retirement plan distribution is not in the surviving spouse's best interest, she must generally decide on whether to take distributions from the plan or transfer the retirement plan assets into an IRA, with resulting distributions from the IRA.

Retirement plan alternative

One positive aspect of distributions from a retirement plan is that the surviving spouse, as a beneficiary, will not be subject to the 10% early distribution tax of Sec. 72(t). A primary disadvantage, however, is that the distributions must be subject to the terms of the plan. If too restrictive, the distribution schemes available may be incompatible with the spouse's financial needs.

IRA owner

In order to obtain more flexibility over the retirement distributions, the surviving spouse could transfer the retirement plan assets to an IRA. Under Prop. Regs. Sec. 1.408-8, A-6 and A-4(b), a surviving spouse who rolls over a distribution from a qualified retirement plan to an IRA may elect to treat the IRA as her own. This election is made if the surviving spouse either (1) receives minimum distributions from the IRA in accordance with the rules that apply to IRA owners and not spousal beneficiaries or (2) makes contributions to the IRA that are subject to, or are deemed subject to, the minimum distribution rules that apply to IRA owners. There is a disadvantage to this course of action, however: The surviving spouse, as owner of the IRA, will...