Some surviving spouses have faced a problem under the tax code. Suppose, for example, Alice Baker is the beneficiary of her late husband’s employer-sponsored retirement plan. The employer’s plan does not permit partial distributions.
Dilemma: If Alice wants to use some of that money for living expenses, she must take the entire amount from the plan. She can roll over all or part of that lump sum to her own IRA; however, any amount rolled to her own IRA will lose its character as a “death benefit” so Alice will owe a 10 percent penalty tax on all withdrawals until age 59 1/2.
Solution: The IRS has issued a private letter ruling (2004-50057), allowing a surviving spouse to roll over money from the deceased spouse’s employer-sponsored plan to an IRA in the name of the deceased spouse. The surviving spouse can take some cash now, keep the rest in a tax-deferred account, and not pay a 10 percent penalty.
To implement this strategy, Alice needs to open an IRA in the name of her deceased spouse (if he didn’t have an IRA already), naming herself as beneficiary. Then, she can instruct the employer-sponsored plan to do a direct rollover to that IRA. She can then withdraw funds as needed from the IRA, penalty-free.
