Wife passed away, how do I handle her small Roth IRA?
My wife of 20 years passed away last month. I’ve been slowly coming to grips with it but there are some financial decisions I need to be prepared make soon. This is one of them.
We had a small Roth IRA set up for her a few years ago with a small amount contributed every month. Now that she is gone what are my options for this account? Total amount in it is about $25k or so from the last quarterly update we saw.
I have a new job now (started two weeks before she passed) and make substantially more than I did previously. That amount represents 2-3 months of my new takehome pay in a LCOL area so I’m fine. So I’m considering passing it on to her two grown children who need the money far more than I do. I’m already planning to split the life insurance (around $40k) between them. That would be a life changing sum for each of them if they set it aside as an emergency fund to give them freedom, or invested in their future somehow. (Edit: it would be about one years salary for each of them)
But I don’t know the tax implications of dealing with this Roth. I made almost all the income during the time we had it — she only worked a couple years for pay during the time she had the Roth, the rest was volunteer work up to the day she passed. So all the payments into it were essentially mine with the tax already paid up front, withdrawn from a joint bank account we’ve held all along.
What are my options for dealing with this Roth IRA? If I can cash it out will I be required to pay tax on it again since it was her Roth even though it was my income paying into it? Or will her kids? (my understanding is it would be a gift so no taxes paid by them but I want to be sure)
Anything else I need to be aware of? Pitfalls? Other better ideas? Suggestions? This is all uncharted territory for me.
Also don’t worry I’m not making any major financial decisions emotionally. I know this is a common concern. Just want to know what the options are so I can potentially give them a large gift from her which is what she always wanted, to provide for them more than she was able to before. She had a very hard life and was supposed to finally be able to relax now that we hit the easy times. I’m going to honor that. They have no idea any of this is coming so I’m looking forward to being able to honor her wishes.
edit: Thanks to everyone who has taken the time to respond. Your advice and thoughts are all appreciated.
Summary of what I’ve got so far:
- There are ways to deal with the Roth that will not involve any taxes. I can cash it out (through a process) and hand them a lump sum each or create a Roth for each of them. (unlikely I will do that as that doesn’t help them now)
- Don’t try to control them, just tell them to honor their moms wishes — “what would mom say?” is great advice.
- Give insurance as lump sum for emergency fund, keep Roth for myself since I don’t have one, and instead pay them each $500/month for 2 or so years (so about $25k) out of my own income to help stabilize their monthly income, get education/training etc. I am starting to really like this idea because it gives them a windfall but also spreads money out, and my wife would also like kickstarting my own Roth. Still need to think through it though.
- Talk to each one when I’m ready to start and see if they would prefer a lump sum or monthly payments. So an individualized plan for each. One may want the lump sum of the insurance while the other wants it over a year or two or three or whatever. And I could still do the monthly in lieu of the Roth payout. This tailors it to each. If they take the monthly I can keep the remainder in a separate account and give them the balance each month so there is full transparency.
- Try to structure things such that they need to take some financial planning courses before they can receive the money. (One of them works nights and so sleeps almost all day, the other works all day 6 days a week and is also taking a certification class several nights a week, so this might be difficult for them to do anytime soon, but I’ll look into it since it is good advice)