What it means
When someone who holds a retirement account dies, the account usually passes to the person named as beneficiary. A surviving spouse often has more choices than any other type of beneficiary, and the rollover is one of the most valuable.
By rolling the money into their own retirement account, the spouse keeps the tax advantages of the account and can often delay withdrawals until their own retirement age. Other beneficiaries, such as children, may face stricter rules on how quickly the money must be taken out.
The alternative is for the spouse to keep the account as an inherited account in the deceased partner's name, which can be better in some situations. The right choice depends on the spouse's age, income needs and other savings.
For example, if the spouse is younger than the age at which penalty-free withdrawals normally start, an inherited account may allow earlier access without the usual penalty. The transfer must be handled correctly to keep the tax benefits.
A direct transfer between the account providers is usually safest, because if a cheque is paid to the spouse personally, taxes may be withheld and strict time limits for redepositing apply. Beneficiary forms matter as much as the will.
The person named on the account's beneficiary form generally receives the money regardless of what the will says, so these forms need to be checked regularly, particularly after marriage, divorce or a death. Because rules, ages and deadlines vary by country, provider and year, anyone in this position should check the current rules with the account provider and a qualified tax adviser before acting.
A rushed decision can be hard or impossible to reverse, and a few weeks of careful advice is usually worth the wait.
In practice
Real-world examples.
Example
A woman inherits her late husband's $400,000 retirement account. She is 58 and does not need the money, so she rolls it into her own account and lets it continue to grow tax-deferred. Her adviser confirms the transfer is made directly between the two providers, so no money ever passes through her personal bank account.
Example
A 45-year-old man loses his wife, who left him a $250,000 retirement account. Because he may need some money soon, he keeps it as an inherited account to allow penalty-free withdrawals, and rolls it over later when he no longer needs access. He asks his adviser to confirm in writing that the later rollover is still allowed under the current rules.
Example
A couple's financial adviser reviews their account paperwork each year. She finds that the husband's beneficiary form still names his previous partner, and gets it updated so the money would pass to his wife. The fix took five minutes and avoided a dispute that could have lasted years.
Case study
Seen in the real world.
Hartley and Imogen Vance are an illustrative, fictional couple who had saved steadily for retirement for over twenty years. Hartley held a $600,000 retirement account and Imogen was named as beneficiary.
After Hartley's death, Imogen, aged 52, met an adviser who explained that she could roll the account into her own, but that she might face penalties for early withdrawals. Because she wanted some flexibility, she kept $100,000 as an inherited account for short-term needs and rolled $500,000 into her own retirement account.
The illustrative lesson is that the choice is not always all or nothing, and that splitting the money can balance flexibility today against tax advantages later. The adviser also reminded her to update her own beneficiary form straight away, so the funds would pass to her children as intended. Within a month, both the rolled-over account and the inherited account showed the right beneficiary.
Watch out
Common mistakes.
- Taking the money out personally by cheque, when a direct transfer between providers avoids unexpected tax and time limits.
- Assuming the will decides who receives the account, when the beneficiary form usually overrides it, so an out-of-date form can send the money to the wrong person.
- Rolling over automatically without considering whether early access to the money might be needed.
Questions
People also ask.
Can only a spouse do this?
In most systems, yes, since the spouse has special options that other beneficiaries, such as children or friends, do not.
Is there a deadline?
Often there are time limits for completing certain choices, which vary by country and provider, so it is important to find out the current deadline as soon as possible and to put it in the diary.
Do I pay tax on the rollover itself?
A correctly handled direct rollover is generally not taxed at the time of transfer, but withdrawals later may be, and local rules should be confirmed with a tax adviser before any money is moved.
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