Use A Spousal IRA

Jim doesn't know if he should tap into his late wife's 401k to pay some expenses. Will he pay for it?

QUESTION: Jim’s wife had a 401K, but recently passed away. He has some expenses that he needs to pay. He wants to know if there’s some kind of account he can open to use her 401K to pay for these expenses. Dave cautions him on taxes, but explains how to open a spousal IRA.

ANSWER: You can roll her 401k into an IRA for you, it’s called a spousal IRA and you can do that when you inherit a spouse’s retirement account. If you want to pay expenses with it, you’ll pay taxes. Just cash it out, but you’ll have taxes due. You won’t have penalties, just taxes. About one-fourth of it will go to the government after you take it out, and the portion you don’t need you should roll to an IRA to keep from sending part of it to the government. If I were you, I’d try to scrape up the $5,000 you need to pay these expenses. If you need to pull some out, you’ll need to pull $7,000 because you’ll pay taxes on the $5,000. The rest, I’d roll to an IRA. But if you can, keep your hands off of it and roll it all to an IRA.