A large number of United States citizens and former Filipino residents of the U.S. are retiring in the Philippines. Many of these retirees have retirement accounts, such as IRAs. Often, the retiree’s IRA is a major asset of their estate and source of income for them and their spouse upon their death. Therefore, it is important to understand the options available for the surviving spouse. Particularly if the surviving spouse is Filipina.
A surviving spouse who is the sole designated beneficiary of the deceased spouse’s IRA has a number of choices not available to non-spouse beneficiaries: they can roll the IRA over into their own IRAs, leave the IRAs in the deceased spouse’s name, start taking distributions over their life expectance or take a lump sum distribution. This gives many planning options not available to non-spouse beneficiaries. However, as with any planning option, it is important to understand how it applies to your situation.
Taking a lump sum distribution is most likely the worst choice, unless the IRA is very small. Distribution from an IRA is typically taxable. As a result, the beneficiary will take into income the IRA the distribution in the year received, which is added to their other income. Note — as long as the IRA assets stay in the IRA, they are not taxable. Also, the income earned on the assets is tax deferred. Thus, no distribution, no tax.
The most common choice is the rollover election. By doing the rollover, the surviving spouse can name his or her own beneficiaries for the IRA and give the IRA a longer life-span if children, grandchildren or other younger family members or friends are named as beneficiaries. This is often referred to as creating a Stretched-Out-IRA. It is the gift that keeps on giving.
Where the surviving spouse is under 59½, the surviving spouse should keep the entire IRA balance in the decedent’s name until the spouse attains age 59½. This way, any withdrawals before that age will be penalty-tax-free. If the surviving spouse transfers the IRA into their name, most likely a distribution will be subject to a 10 percent early withdraw penalty. When the spouse attains age 59½, he or she can roll over the IRA into an IRA in the spouse’s own name and take distributions without being subject to the 10 percent early withdrawal penalty. Note — the regulations make it clear that a surviving spouse beneficiary’s election to treat the decedent’s IRA as her own can be made “any time after the individual’s date of death.”
Where the U.S. retiree is married to a Filipina, planning for the IRA distribution after death is important. Most likely, the Filipina spouse will not qualify for the decedent’s Social Security, unless they are a U.S. citizen or lived in the U.S. for five years. As a result, the IRA may be their main source of income. In most cases, the IRA should be structured to be distributed over the surviving spouse’s life, to provide a lifetime source of income.
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Author’s email: wolff2000@earthlink.net
