Dec 28, 2018 4 min read

This week, we will talk about some unusual IRA rules.

Sometimes, federal law allows special benefits for military personnel. One, which most people do not know about, allows the beneficiary of military death gratuities and Servicemembers’ Group Life Insurance to contribute funds to a Roth IRA or a Coverdale Education Savings Account. This can be a good way to produce tax-free income at a later date or to help fund a college education for a child.

Remember, life insurance death benefits are not normally taxable.

The Roth contribution can be made without regard to normal annual contribution limits. If necessary at a later date, money can be pulled out of this special IRA tax-free without having to meet the regular Roth rules of five years and being 59 ½ or older. The contribution must be made by the end of the year following receipt of the benefit.

Now let’s talk about inherited IRAs. The I in IRA stands for individual. An IRA can never be jointly owned by spouses. One can be a beneficiary of the other’s qualified funds. Upon death of one spouse, only a spouse can make the deceased’s IRA his or her own. Children cannot do this.

Children, spouses and others can inherit an IRA. This inherited IRA will need to be titled properly and required minimum distributions must be taken even though the beneficiary might not yet be 70 ½. It is based on a beneficiary’s age, which must be younger. This would mean the RMDs would be less.

The rule about whether a spouse should treat a deceased partner’s IRA as inherited or as his or her own would depend on the surviving spouse’s age. If that individual is under 59 ½, the person should treat it as inherited – so if he or she needs to pull money out for living expenses, the individual would not have to pay a 10 percent on top of regular income tax rates.

Once a person reaches 59 ½, he or she could convert the IRA to his/her own. Then RMD withdraws would be based on their age.

It is important to remember individuals transferring money from a deceased spouse’s IRA must be careful about the once-per-year rule. It says you can do only one 60-day rollover every 12 months. This is when the IRA balance is sent directly to you.

The custodian is required to withhold 20 percent of the total for taxes and send you the balance of 80 percent. You have 60 days from receipt of the money to place it in a new IRA investment or the money is considered taxable and you will be taxed on the total.

It is important to remember, you must come up with the 20 percent withheld from another source and deposit the total. When you file your next income tax return, you will show the IRS that you followed the rule and it will refund the 20 percent. You are only allowed to do one every 12 months and this includes IRAs and Roth IRAs.

You must be careful if your deceased spouse had multiple accounts. The way to avoid this problem is to do trustee-to-trustee transfers. This is when the money is sent from the deceased spouse’s account directly to your new account. When done this way, there is no 60-day rule, no 20 percent withholding and you are not limited to one every 12 months.

IRAs are important retirement accounts and it is important to follow the rules so you do not have to pay unnecessary taxes.

Gary Boatman is a Monessen-based certified financial planner and author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”

To submit columns on financial planning or investing, email Rick Shrum at rshrum@observer-reporter.com.