Hi, Gail-

My mom died this year (2008), leaving dad her 401(k) account. He just turned 70, which means he’s going to have to start taking those mandatory withdrawals from his IRA. The thing is, he doesn’t need the money in Mom’s account right now and would like to avoid paying income tax on it for as long as possible.

Mom’s 401(k) is with a major mutual fund company. They’re telling him he can delay taking withdrawals if he leaves the money where it is. But he isn’t impressed with the performance of their funds. His financial advisor says his only other choice is to roll the money into an IRA in his own name, which he’d then have to start withdrawing from.

Is there another option?

Thanks,
Todd

Dear Todd-

There is a very simple way to accomplish exactly what your dad wants. The key is that he must not roll your mom’s 401(k) account into an IRA titled in his name!

A spouse who is the beneficiary of retirement assets has more choices than someone who was not married to the account owner, such as a child or sibling. One option is to “roll over” the account into an IRA in his/her own name. While this is what most people do, in most cases it’s more of a knee-jerk reaction than a carefully considered strategy. More importantly, it’s not always in the best interest of the surviving spouse.

Rolling a deceased spouse’s account into an IRA in your own name is an irreversible decision. The result is that the name of the dead spouse is permanently removed from the title and the surviving spouse is recognized as the sole and legal owner of the assets. This comes with both privileges and responsibilities.

For instance, only the legal owner of an IRA has the power to name and change the beneficiaries listed on the account. On the other hand, as you point out, the owner of an IRA must start “required minimum distributions” (RMDs) after they reach age 70½ -- something your dad doesn’t want to do.

One way to avoid this would be to leave the money in the 401(k) with your mom still listed as the owner of the account and your dad the beneficiary. Dad could then postpone taking withdrawals until the year in which your mom would have had to start. Not all 401(k) plans will allow this, but your mom’s apparently does.

However, as you point out, your dad isn’t happy about the investment choices that your mom’s 401(k) offers.

Boston attorney Natalie Choate, the author of “Life and Death Planning for Retirement Benefits,” says the solution is for your dad to roll your mom’s 401(k) benefits into what is called an “inherited” or “decedent” IRA. In this case, the IRA would be “in the name of the deceased spouse payable to the surviving spouse.”

The title would be along the lines of: “XYZ Trust Company, Custodian for the IRA of Mom, DCD. Dad, BENE. Dad’s Social Security Number.” (1)

The result is similar to leaving the money in the 401(k): but since your mom would be the legal owner of this IRA, your dad would not have to take RMDs from it until the year that she would have turned 70½. That would give him four or five additional years to delay withdrawals.

Once the assets are rolled into the “inherited” IRA, your dad can choose from literally thousands of investments -- mutual funds, individual stocks and bonds, etc. Not having to take any required distributions for several years would also provide time for the account value to potentially recuperate from the beating it took during this bear market.

When we hit the year your mom would have to start taking RMDs if she were alive, your dad can simply roll “her” IRA into his. Since your dad will have to begin RMDs from the inherited IRA at that point anyway, consolidating the two IRA into a single account will make it easier for him to calculate his annual withdrawal amount. It would also make it simpler to keep track of investment performance and reduce the paperwork and record-keeping.

If your dad’s financial advisor can’t or won’t help him roll mom’s 401(k) into an “inherited” IRA, find someone who will. This is elementary. Makes me wonder what else your dad’s advisor doesn’t know.

1. DCD is the abbreviation for “deceased”; BENE stands for “beneficiary.”

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