Social Security and IRAs when suddenly single

(MoneyWatch) Recently I wrote about when people who are suddenly single -- whether widowed or divorced -- and the things they need to consider before making financial decisions.

I've always said that to avoid costly mistakes, individuals should try to avoid making financial decisions during an emotional time. The loss of a spouse or partner due to death or divorce can be a time of extreme emotions. Unfortunately it's also a time when important financial decisions have to be made.

This is a time when many financial matters require immediate attention and objective and clear thinking. Some of these matters include handling retirement accounts, sorting through Social Security benefits and making sure you are properly insured. Here are a few of the decisions that often have to be made and some guidance and direction as to what to do.

Dividing Retirement Accounts: The requirements for transferring or dividing retirement assets differ depending on whether this is due to the death of the owner or divorce. Upon the death of an IRA owner, the account will be owned according to the beneficiary designation for the account, which is often the surviving spouse. Even if the will includes provisions for who shall inherit retirement accounts, the beneficiary designations on these accounts supersede the provisions in the will. This is why it's critical to review and keep beneficiary designations for all retirement accounts, such as 401(k), 403(b), 457, and IRAs, current.

When there is no beneficiary designated on a retirement account, the surviving spouse is typically entitled to the account. You can either roll the IRA into your own IRA and no withdrawals would be required until after age 70. If you do this, you are also subject to a 10 percent penalty if you take distributions before age 59 1/2. If instead you need some of the money before 59 1/2 , you could roll the IRA into an inherited IRA and begin taking minimum distributions before age 59 1/2 and not be subject to the 10 percent early withdrawal penalty.

In a divorce, retirement assets are often split up as outlined in a divorce agreement or through a Qualified Domestic Relations Order, or QDRO. This is a special form of court order that specifies an alternate payee and their right to receive all or a portion of their former spouse's retirement account balance and pension benefits. The importance of this court approved order is that IRAs are then divided and transferred from one spouse's IRA to the other's IRA without any income tax or tax penalties. If instead the IRA is divided without a QDRO, then the amount distributed is taxable as income to the original IRA owner while the spouse who receives the distribution gets it tax free.

Collecting Social Security Benefits: Both surviving and divorced spouses can be offered benefits through Social Security. Both are generally entitled to a benefit amount that is equal to up to 50 percent of the benefits their former spouse could receive if that amount is greater than the amount they would receive on their own Social Security earnings record. For most workers, Social Security retirement benefits can be collected as early as age 62, but for surviving spouses can collect reduced benefits as early as age 60. A surviving spouse who is also disabled can collect benefits as early as age 50.

Divorced spouses can be eligible for Social Security retirement benefits based on their ex-spouses earnings record if that amount is greater than their own benefit. To collect these benefits, they must have been married for at least 10 years, be unmarried, be at least age 62 and the ex-spouse must be eligible to collect their own Social Security benefits.

Check back in a few days when I'll write about some of the insurance decisions that need to be made when people are suddenly single.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.