Is the distribution from a deceased spouse's retirement plan taxable? Do I take a lump sum or roll it into an IRA?

Our good friend Ed Slott, a CPA who is the country's leading authority on tax and estate planning for retirement savings, says it is taxable UNLESS the plan is a Roth IRA, in which case all distributions, with certain restrictions, are tax-free. The fact that you will pay taxes on all distributions is as good a reason as any to NOT take a lump sum. You can roll it over into an IRA in your name or into your current plan. If you are 59^1⁄2 or over, you can start taking distributions from your spouse's plan.

Your inherited IRA can last much longer, since a new set of rules governing minimum withdrawals went into effect in 2002. "Under the old rules," explains Slott, "many beneficiaries ended up using the 5-year rule, which meant that the entire inherited account had to be withdrawn by the end of fifth year following the year of death." Now you can take annual distributions based on actuarial tables that calculate your life expectancy. This way you can also take smaller distributions, which means lower taxes. Children who inherit IRAs from their parents can take the payouts over their own life expectancies; but they should keep the IRA in the deceased parent's name, as rolling it over into their own IRAs will effectively end the IRA and leave them with an income tax bill, as well as an estate tax bill if the estate is large enough.

For up-to-date information about retirement fund distributions, see Ed's Web site: www.irahelp.com.

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