Widows’ Pensions
Let’s explore options from three sources where a surviving spouse may be eligible to collect a pension or income based on their deceased spouse’s eligibility. Veterans’ Survivor Pension, Social Security and retirement plans.
Veterans’ Survivors Pension Eligibility Overview
The Veterans Association (VA) offers pension benefits to the survivors of wartime Veterans who meet certain criteria. Among other requirements, the yearly family income must be less than the amount set by Congress providing those eligible with possible tax-free supplemental income. The following types of pension support for Veterans’ survivors are offered by the VA:
Survivors Pension – Surviving spouses and dependent children of deceased wartime Veterans are eligible for monthly pension benefits if they meet the net worth and income requirements. Additional Pension Allowance – Surviving spouses and dependent children of deceased wartime Veterans may receive a larger pension if they are housebound or cannot perform activities of daily living without the aid of another person.
For updated information log on to this link:
Social Security Widow Benefits
Today, there are approximately 5 million[1] widows and widowers receiving monthly Social Security benefits based on their deceased spouse's earnings record. And, for many of those survivors, particularly aged women, those benefits are keeping them out of poverty.
A widow or widower can receive:
Reduced benefits as early as age 60 or full benefits at full retirement age or older.
Benefits as early as age 50 if they're disabled AND their disability started before or within seven years of your death.
Note: If a widow or widower who is caring for your children receives Social Security benefits, they're still eligible if their disability starts before those payments end or within seven years after they end.
Widows, widowers, and surviving divorced spouses cannot apply online for survivors’ benefits. If they want to apply for disability benefits on your record, they should contact Social Security at 1-800-772-1213 to request an appointment at their local office.
Some additional pointers to note are that if your widow or widower remarries after they reach age 60 (age 50 if disabled), the remarriage will not affect their eligibility for survivors benefits. As well as your widow or widower who has not remarried can receive survivor’s benefits at any age if they take care of your child who is under age 16 or is disabled and receives benefits on your record.
For more details use this link to access social security directly: https://www.ssa.gov/planners/survivors/onyourown2.html
Retirement accounts
There are two primary types of IRAs you can inherit; a Traditional IRA or a Roth IRA. This article focuses on the rules around inheriting a Traditional IRA from a spouse.
If you inherit an IRA from your spouse, there are three primary choices you have as to how to treat the IRA.
You can always cash in the IRA. However note that when you cash in an inherited IRA you will pay income taxes on the amount withdrawn, but no penalty taxes, regardless of your age. (Normally IRA distributions prior to age 59 ½ are subject to a 10% early IRA withdrawal penalty tax.)
Despite the fact that no penalty taxes apply this is often not your best choice. You have to consider your tax bracket. Cashing in a large IRA could mean anywhere from 25% – 39.6% of it goes right to federal taxes. State income taxes will apply too. For these reasons, often you are best off only withdrawing money out as needed instead of cashing in an entire inherited IRA.
The options of drawing money out as needed means you will treat your inherited IRA using either one of the following two options
You can treat the IRA as your own.
You can choose to treat the IRA as if it was your own IRA by either naming yourself as the account owner or by rolling the inherited IRA into your own IRA account. This can often be your choice to consider if you are over age 59 ½ and/or if your spouse was older than you, and you want to delay required minimum distributions (RMDs) as long as possible.
If you choose to treat the IRA as your own your future RMDs will be determined based on your age as the account owner starting with the year you become the owner.
Example: Your spouse was 72, you are 65. You spouse had started taking their RMDs at their age 70 ½. You elect to treat the inherited IRA as your own. Now you do not have to take annual RMDs until you reach age 70 ½. The advantage to this is continued tax deferral. Keep in mind, if you are over age 59 ½, you can still take withdrawals if they are needed and no penalty tax will apply. It’s just you won’t be required to take withdrawals until you reach age 70 ½.
Caution: If you are not yet 59 ½, and you choose to treat the IRA as your own, now future distributions will be subject to a 10% penalty tax. If you have several years to go before reaching age 59 ½ this final option may be a choice for you to consider.
You can treat yourself as the beneficiary of the IRA.
If you choose to treat yourself as the beneficiary of the IRA, different rules apply than if you choose to treat the inherited IRA as your own. This may be your option to consider if you are under age 59 ½, and/or if you are older than your spouse.
Here’s how it works:
When you set the account up so you are the beneficiary of the inherited IRA now your required minimum distributions will be determined by the age of your spouse at their death. Two possibilities are outlined below.
If your spouse died after their RMDs started (They were over age 70 ½.)
If your spouse passed after their RMDs started (meaning they were age 70 ½ or older) you have to take distributions based on the longer of:
Your deceased spouse’s life expectancy based on their previous RMD schedule
Your own single life expectancy
If your spouse died before their RMDs started
If your spouse passed before their RMDs started you can defer distributions until their RMDs would have started and then take distributions over your single life expectancy.
If you are not yet 59 ½, the advantage to this choice is that you can take withdrawals if needed and no penalty tax will apply. If you are older than your spouse, the advantage to this option is that you can defer the RMDs until your spouse would have been required to take them, which will be a later date than your own age 70 ½.
Nothing in this article is intended to be specific advice. As a spouse who inherits an IRA it is important to carefully weigh out your options based on your cash flow needs and tax situation to determine which way you should treat your inherited IRA.
If you are the beneficiary of a 401k plan or inherited a 401k plan, your choices as far as how and when you are required to take the money out will depend on:
Whether you were the spouse of the deceased person, or a non-spouse
Your age and the deceased person’s age at death
Spouse 401k Beneficiary – If You Inherited a 401k Plan from Your Spouse
If Your Spouse Was Over Age 70 ½ and You Are Over Age 70 ½
If your spouse was over age 70½ and thus had already started taking required minimum distributions at the time of death, and you are over age 70 ½, the rule is that you must, at a minimum, continue to take out at least the required minimum distributions. This could happen in a few ways.
You can leave the money in the plan, continuing the distributions according to the required minimum distribution schedule that applied to your spouse if the plan allows and if you desire you can take out more than this amount, but not less. The beneficiary designations set up by your spouse would continue to apply at your death.
You can roll the funds over to a specific type of account titled as an inherited IRA. As an inherited IRA you would take required distributions based on your single life expectancy table. If you desire you can take out more than this amount, but not less. You would name your own beneficiaries with this option.
You can roll the funds over to your own IRA, called a spousal IRA. With this option you would take required distributions based on your age and the Uniform Lifetime Table. If you desire you can take out more than this amount, but not less. You would name your own beneficiaries with this option. For most people, this is an option to consider.
If you and your spouse were about the same age, the choices above will result in about the same required distribution. However, rolling it over to your own IRA may provide additional choices for your future beneficiaries.
You can check out a required minimum distribution calculator to calculate the amount you would be required to take. It is based on your age and the applicable table.
If You Are Over Age 59 ½, But Under Age 70 ½
If you are the beneficiary of your spouse’s 401k plan and you are over age 59 ½, but not yet 70½, you have a few choices:
You can leave the funds in the plan. If your spouse was over age 70 1/2 and had started their distributions you would continue taking these required minimum distributions each year, or you would begin taking them at the time your spouse would have reached age 70 1/2. The beneficiary designations set up by your spouse would continue to apply at your death.
You can roll the funds over to a specific type of account titled as an inherited IRA. As an inherited IRA you would take required distributions based on your single life expectancy table. If you desire you can take out more than this amount, but not less. You would name your own beneficiaries with this option.
You can roll over the account into your own IRA. The potential advantage to this is you will not be required to start distributions until the calendar year after you reach 70½. This option provides additional flexibility because you can withdraw the money if needed, but you won't be required to withdraw it until you reach age 70 1/2. You would name your own beneficiaries with this option. For most people this is the option to consider.
If your spouse was older than you, you need to project your current and future income and tax rate to determine if it is best for you to delay distributions until your age 70 1/2, or continuing with the annual required distributions if your spouse had already been required to start taking them.
Additional IRA distributions may make more of your Social Security income taxable. It thus may be to your benefit to take more IRA distributions before your Social Security benefits start, and then you would be required to take less out later.
A skilled retirement planner can help you determine a suitable course of action.
If You Are Under Age 59 ½
If you inherit a spouse’s 401k plan but you are not yet age 59 ½, consider the pros and cons of the following choices:
You can leave the money in the 401k plan. With this option you could take withdrawals as needed, if the plan allows, and the 10% penalty tax would not apply even if you have not yet reached age 59 1/2. You will still pay regular income tax on any amount withdrawn. (With this choice if your spouse was over age 70 ½, you will be required to continue the required minimum distributions.) The beneficiary designations set up by your spouse would continue to apply at your death.
You can roll the funds over to a specific type of account titled as an inherited IRA. As an inherited IRA you would take required distributions based on your single life expectancy table. If you desire you can take out more than this amount, but not less. With this option withdrawals would not be subject to the 10% penalty tax even if you are not yet 59 1/2. You would name your own beneficiaries with this option.
You can rollover the 401k plan to your own IRA account. There will be no taxes on this transaction. However, if you are not yet age 59 ½, you may not want to do this, because once it becomes your own IRA any distributions you take will be considered early distributions and subject to a 10% penalty tax as well as regular income taxes. You would name your own beneficiaries with this option.
For most people in this age range, the options to consider will be option 1 or 2 above.
[1] ssa.gov 2015