Q.     My wife passed away recently and I am the beneficiary of her rather large IRA. Do I have to start taking distributions now? Also, can I name a beneficiary of this IRA in the event of my death? If so, can I name more than one?

A.     I'm sorry to hear of your loss. A spouse named as the beneficiary of an IRA has some unique options; a brief explanation will follow. Once you have decided on an option make sure you name a primary and a contingent beneficiary. You can ame as many beneficiaries and contingent beneficiaries as you like. It is common for a beneficiary form to provide just enough space to name two people. If you need more room write "see attached list of primary and contingent beneficiaries" in the space provided and attach the list to the form.
         As a spousal beneficiary you can either roll over the inherited IRA or remain as beneficiary. The spousal rollover allows you to transfer the IRA to your own IRA. The inherited IRA becomes your own and the rules for calculating the Required Minimum distributions (RMDs) are the same as any IRA owner. This is only true when a spouse inherits the IRA, non-spousal beneficiaries are not allowed to roll an inherited IRA to their own. The spousal rollover can be accomplished by withdrawing the balance and depositing it in your own IRA within 60 days or by a trustee-to-trustee transfer. I prefer the trustee-to-trustee transfer; funds go directly from your spouse's IRA to your own. If you wish to remain with the same trustee, you can just retitle the account in your name. If you are a participant in a company plan and they will agree to accept the money in the IRA, you can also roll the IRA into the company plan.
        The rules concerning distributions from the roll over IRA change depending on your age and your spouse's age at time of death. The Required Beginning Date (RBD) for RMDs is April 1 after the year the IRA owner turns 701/2. If your spouse was past her RBD and died without taking her RMD, you must take this distribution if you have not reached your RBD. You would withdraw her RMD and then roll the remainder to your own IRA. Future RMDs are based on your RBD since you are the new owner. If you are both past your RBD at time of death, her RMD must be taken and you must begin your RMDs from the roll over IRA the year after your wife's death. If neither of you have reached your RBD, no distribution is required until your RBD.
         If you are under age 59 ½, you may wish to remain as a beneficiary rather than selecting a roll over and becoming the IRA owner. As a spouse choosing to remain as a beneficiary, you must begin taking RMDs by whichever is later, December 31 of the year the IRA owner would have turned 70 ½ or December 31 of the year following the IRA owner's death. You still have access to the money prior to the RBD. As a spouse beneficiary, if you need some of the money to live on prior to age 59 ½ you can avoid the 10% penalty. The 10% early withdrawal penalty applies to owners not beneficiaries. These are special spousal rules; a non-spouse beneficiary must begin RMDs the year following the IRA owner's death. You can still roll the IRA over to your own when you reach your RBD. This is beneficial due to the different life expectancy tables used for owners (uniform lifetime table) and beneficiaries (single life expectancy table). The uniform lifetime table has a higher/longer life expectancy factor so the RMD is lower. The lower the RMD the lower the tax bill and the benefits of tax deferral remain in place for a longer period of time.
          As with most major financial decisions, a consultation with a knowledgeable adviser is recommended.

Send questions to Holly Nicholson, CFP, JD, P.O. Box 99466, Raleigh, NC  27624  or go to her Web site, www.askholly.com. For private client issues call 676-2806.