Inherited IRA: Important Options for Surviving Spouse

A surviving spouse who inherits an IRA has a lot of flexibility in deciding what to do with the account. Proper planning and knowing your options can help you establish lifetime income opportunities, avoid paying higher taxes or penalties, and create a lasting legacy for your beneficiaries.

Inheriting an IRA divides you into two groups: a surviving spouse or a non-spouse. In this article we will be reviewing the options for a surviving spouse who in general has the following choices:

(1) Leave the IRA as it is. 

  • This is an option only if you are the account owner's surviving spouse and sole beneficiary.
  • You can leave the IRA in your deceased spouse’s name, continue to be the beneficiary and retitle the account as an Inherited IRA.
  • Additional contributions cannot be made to the IRA since only the original account owner can make a contribution.
  • Required Minimum Distributions (RMDs) are required, but will be based upon your life expectancy.
  • You will not incur the 10% early withdrawal penalty if a distribution is taken before 59 ½.
  • You are not locked into this option. At any time you can roll the money into your own account. 

(2) Rollover the IRA to a new or existing IRA held in your name (treating it “as your own”). 

  • This is an option only if you are the account owner’s surviving spouse and sole beneficiary.
  • This is a tax-free event and may be beneficial if you do not need the assets immediately and want to keep the money in a tax-advantaged account.
  • All of the standard rules that apply to an IRA will apply to you as if you owned the account from the start.
  • If your spouse was over 70 ½ at the time of death and did not take the RMD as of yet, you must distribute that RMD by December 31 of the year after death or you may be subject to an IRS penalty of 50% of the required amount. This RMD amount is ineligible to be rolled over and must be reported to the IRS under your Social Security number.
  • The registrations of the account you rollover and the receiving account need to be the same, such as a Traditional IRA to a Traditional IRA.
  • The account will not be considered an Inherited IRA.
  • You may designate your own beneficiary.

(3) Transfer the IRA to a new or existing Inherited IRA held in your name.

      Method 1: The Life Expectancy Method

  • If you transfer the IRA to an Inherited Traditional IRA and your spouse was over 70 ½ when he or she died, RMDs must start by December 31 of the year after death. If your spouse was under 70 1/2 when he or she died, RMDs must start by December 31 of the year the account holder would have reached 70 ½.
  • If you transfer the IRA to an Inherited Roth IRA, unlike the original owner, you must take RMDs. You have the option to postpone distributions until the later of when your spouse would have attained age 70 ½ or December 31 of the year after death. As long as the assets have been in the Roth IRA for five or more years, these RMDs can be withdrawn federally tax-free.
  • Annual distributions are spread over your single life expectancy.
  • If the original account holder was over 70 ½ and did not take an RMD in the year of death, an RMD must be taken from the account by 12/31 of the year the original account holder died.
  • If there are multiple beneficiaries, separate accounts must be established by December 31 of the year following the year of death; otherwise, distributions will be based on the oldest beneficiary.
  • You will not incur the 10% early withdrawal penalty if the distribution is taken before 59 ½.
  • The account will be considered an Inherited IRA.
  •  You may designate your own IRA beneficiary.

     Method 2: The 5 Year Method

  • This is an option if your spouse was under 70 ½ when he or she died. 
  • You have five years in which you can withdraw the assets from the Inherited IRA at any time and amount, as long as they are fully withdrawn by December 31 of the fifth year following their death.
  • You will not incur the 10% early withdrawal penalty if you take a distribution before 59 ½.
  •  Distributions from a Roth IRA can be taken during that period without being taxed provided that the five-year holding period has been met, otherwise only earnings are taxable.
  • The account will be considered an Inherited IRA.
  • You may designate your own IRA beneficiary.

(4) Take a Lump Sum Distribution.

  • All assets in a Traditional IRA are distributed to you and you will pay income taxes on the distribution all at once.
  • If all assets in a Roth IRA are distributed to you from an account that is less than five years old at the time of the account holder’s death, the earnings are taxable.
  • You will not incur the 10% early withdrawal penalty if the distribution is taken before 59 ½.
  • You may move into a higher tax bracket depending on the amount of taxable distributions and your current income level.

(5) Disclaim the IRA.

  • You may refuse to accept ownership of the IRA either in part or in full and it will go to the contingent beneficiary.
  • You must disclaim the account within nine months after the death of your spouse and before you take possession of the funds.
  • Once you disclaim the IRA, you are unable to get the money back if you change your mind.

Carol Chaudet

Last Updated: 06/28/16