If your husband dies or you decide to divorce, you need to take care of finances which include Roth IRA accounts. You have the option of transferring the account over to your name, but you must make sure you follow the IRA rule to avoid additional taxes applied to that account.
What is a Roth IRA?
The Roth Individual Retirement Arrangement is a type of retirement plan that usually isn't taxed upon withdrawal. It differs from a traditional IRA in that monies placed within a traditional account typically aren't taxed before being deposited but are taxed upon withdrawal or distribution. Individuals using Roth IRAs place previously taxed money in the account so that upon withdrawal at retirement, a tax break is provided.
Your Roth IRA Options in the Event of Death
The language of an inheritance document such as a will or trust deed can be confusing. If your husband placed his Roth IRA within the estate, it is possible that you will be required to pay an estate tax. Income tax will be exempt from withdrawal because the tax was paid before the money was placed into the account.
A wife can't draw from a husband’s Roth IRA account if it was established less than five years before his death. Unless your husband died a premature death, a 10 percent distribution penalty is applied upon withdrawal. Examine the details of your husband’s Roth IRA account to determine when you can withdraw money without penalty.
Your Roth IRA Options in Divorce
To avoid unnecessary taxes and penalties to Roth IRA account, a divorce must be complete and finalized. During a divorce, most assets and valuables are split up using a qualified domestic relations order. This order is a legal document that splits up pensions and other retirement plans. To transfer a Roth IRA from a husband to a wife, a QDRO is not needed.
Once the divorce is complete, the transfer of the IRA account needs to take place shortly thereafter, otherwise both parties might be required to pay taxes in the transfer. If the transfer takes place during the divorce, a 10 percent early distribution fee is assessed. An IRA custodian can advise you the best time to make a transfer after a divorce.
Transferring a Husband’s Roth Account
Talk with an IRA custodian who holds your husband’s IRA. Typically a bank or brokerage firm will hold your husband’s account. You will be required to provide a copy of his death certificate, your identification and confirmation that you are the beneficiary of his account.
The custodian will give you paperwork to transfer your husband’s account in your name. It is possible to combine your husband’s IRA to your Roth IRA if you have one. The custodian will have specific guidelines and additional paperwork for you to fill out if you wish to combine both accounts.
Additional Roth IRA Rules
If your husband’s Roth IRA has been established for longer than five years, you might be able to qualify for a lump sum distribution. Again, you still might be entitled to pay additional inheritance taxes, but a lump sum distribution means you could remove all the money from the account and use it immediately.
By law, you are required to have an IRA custodian over any Roth or traditional IRA account, but you will still be able to make decisions regarding the money held in you or your husband’s account. After transferring the IRA to your name, search for a reputable IRA custodian for the best advice on investment options.
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