Exception to 10 percent penalty tax

[joel]

Widow, age 51, is rolling over her deceased husband's (age 53) lump sum settlement from his Qualified Plan to an IRA. Will her IRA distributions prior to age 59 1/2 be exempt from the 10 percent penalty tax? How should the IRA be titled?

[GMK]

Basically, no. Distributions from the IRA will be subject to the 10% penalty until age 59-1/2 with some exceptions, which I believe are for essentially equal payments (at least annually) over the expected lifetime, for qualified higher education expenses, up to $10,000 for qualified first time home purchase, and for distribution payments made after you receive unemployment comp for 12 consecutive weeks (or would have except you're self employed).

Widow can title the IRA in her own name or as an inherited IRA for her benefit. If memory serves, if it's in her name, RMD's don't start until she is 70-1/2. If an inherited IRA, then RMD's begin when he would have been 70-1/2. I'm pretty sure that the under 59-1/2 penalty is based on her age whichever way she titles it.

[masteff]

IRS Form 5329, instructions for line 2, exception # 04: "Distributions due to death". Note that this exception, unlike some of the others on page 3 does not specify "qualified retirement plan" or "IRA" as it applies to both. (It's worth making a note of this form and exception as she may well have to file that form and claim that exception in future years; sometimes it's easier to file 5329 than to argue w/ investment firms over 1099-R coding.)

My opinion is the IRA should be titled as an inherited IRA until she reaches age 60+ at which time she could elect to treat it as her own and thus delay minimum distributions by two years when she reaches 70 1/2. Failure to title it as an inherited IRA is likely to cause problems. The brokerage firm is likely to insist she can make it her own, she needs to be firm and insist it be an inherited account.

Not that Fidelity is always right but here's what they had to say on it...

https://www.fidelity.com/viewpoints/surviving-spouse-IRA

"If you find yourself in this situation, you can take withdrawals penalty free, even if you’re under 59½, if you instead transfer the assets to an Inherited IRA, also known as an IRA beneficiary distribution account."

[GMK]

Thanks, masteff. Good to know this.

[joel]

Recognizing that she is exempt from the 10 percent penalty tax does she still have the option to establish a SEPP which mandates that she takes no more but no less than the calculated amount per year until she reaches age 59-1/2? I believe this strict payout plan will "encourage" her to get a job, lest she depletes the IRA prematurely.