It is often beneficial to name the spouse as the primary beneficiary of a retirement plan or IRA. In fact, with a retirement plan like a 401(k), 403(b), etc., the spouse must be named as the primary beneficiary unless they sign a “spousal waiver” consenting to having a different beneficiary named. Even if the participant were not married when they completed the beneficiary designation form, their surviving spouse would have a right to the retirement benefits unless the spouse signed a waiver. With an IRA, there is no federal requirement that the spouse be named as the primary beneficiary. However, state law may impose similar requirements on IRAs.
Naming a spouse can be advantageous anyway. Upon the participant’s death, the surviving spouse can elect to do a “spousal rollover” of the funds. If the surviving spouse chooses to do a spousal rollover, the amounts are treated the same as if the spouse had contributed the funds. There are three major advantages. First, no distributions are required until after the spouse reaches age 70 ½. Second, their Required Minimum Distributions (“RMDs”) are based on the Uniform Lifetime Table. The Uniform Lifetime Table is the joint life expectancy of the surviving spouse plus a hypothetical individual 10 years younger. For example, at age 71 the Uniform Lifetime Table would show a joint life expectancy of 26.5 years. This is important since the RMD is calculated by dividing the account balance by the remaining life expectancy. If the account had $1 million, the RMD would be $37,736. The third advantage is that when the spouse dies, his or her beneficiaries may be able to stretch the distributions over their own life expectancies.
If the spouse wanted to do so, they could do nothing and the retirement proceeds would be treated as an inherited account. At age 71, the life expectancy pursuant to the Single Life Table is 16.3 years. Thus, the RMD for that year for the same $1 million account would be $61,350. Thus, a spousal rollover would allow the spouse to stretch the payouts over a longer period of time.
There are many advantages to a rollover. However, there is one potential disadvantage to a rollover. If the surviving spouse elects to do a rollover, the account is subject to the pre-59 ½ penalty for early withdrawals. An inherited account would not be subject to those penalties if it were not rolled over. If the spouse is very young and will need most of the money quickly, the rollover may not be the best option.
As in other areas, there are special rules for a surviving spouse. Make sure you know the rules so that you don’t fall prey to them and can take advantage of them for your clients.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys
Direct Line: (858) 300-4739