Inheriting an IRA from Your Spouse: What Are Your Options?

Presented by Kevin M. Arquette, CFP?

Losing a spouse is one of the most difficult things anyone can experience. It is important for you to know what your options are and which one is best for you. As a spouse inheriting IRA assets, you can move the assets either to your own traditional or Roth IRA or to a spousal-inherited IRA opened in your name.

Always Consult with a Professional

Each option comes with different considerations and rules to follow. Will your decision require you to take mandatory distributions? Will you be able to make additional contributions? Are there penalties you need to be aware of when you eventually distribute the assets? The answers to these considerations are discussed below. But before you make your decision, be sure to consult with your financial advisor or tax professional to determine which option is best based on your unique set of circumstances.

Option 1: Transfer the funds to a spousal-inherited traditional or Roth IRA in your name. Distributions you take from your spousal-inherited traditional or Roth IRA aren’t subject to withdrawal penalties; however, you are not permitted to make additional contributions to the account after the initial funding. In addition, you must take the required minimum distributions (RMDs) from the account. The start date for your RMDs will depend on how old your spouse was upon death.

Option 2: Transfer the funds to your own traditional or Roth IRA. This strategy is commonly referred to as “treating the assets as your own.” With this option, you would transfer the assets directly into your own traditional or Roth IRA. The standard traditional and Roth IRA rules will apply to contributions, distributions, and RMDs.

RMD rules. When and if an RMD is required will depend on the type of account to which you choose to transfer the funds and how old your spouse was when they passed away. RMDs from traditional IRAs must begin at age 73 * , while Roth IRAs do not have RMDs. For spousal-inherited IRAs, RMDs must begin the year your spouse would have reached their own RMD age.

IRS guidelines require you to take larger RMD amounts from a spousal-inherited IRA than if you opened a traditional IRA. Generally, the option with the lowest RMDs that allows you to delay them as long as possible is best. This would lessen the tax liability on your RMDs and enable you to stretch your retirement assets over a longer period of time.

Key Considerations

How old are you? Distributions from a spousal-inherited IRA are always penalty free regardless of your age. The same is not true for traditional and Roth IRAs, however. Distributions taken from these accounts by an account owner who is younger than 59? may be subject to a 10 percent early withdrawal penalty.

Consequently, if you are younger than 59?, the spousal-inherited IRA option may be the best choice because you would have access to the funds if needed without having to worry about paying an early withdrawal penalty. For example:

Elizabeth is 48 years old and inherits her deceased husband’s IRA. She transfers the assets to a spousal-inherited IRA. When she needs that money to pay for living expenses, she can take distributions from the account without owing penalties. The fact that she is younger than 59? doesn’t matter.

If you move the assets to your own traditional IRA instead of a spousal-inherited IRA in your name, normal IRA distribution rules would apply. Any distributions you might take would most likely be subject to a 10 percent penalty because you are younger than 59?. Returning to our example:

If Elizabeth puts the inherited assets into her own IRA rather than a spousal-inherited IRA, she would be penalized on the distributions she takes to pay for living expenses, as the normal IRA rules would apply. Specifically, because she is younger than 59?, Elizabeth would be subject to the 10 percent early withdrawal penalty on distributions from the account.

How old was your spouse? When treating the assets as your own, when your RMDs begin is determined by your age. As mentioned earlier, if you choose a spousal-inherited IRA, your RMDs begin the year your spouse would have reached their own RMD age.

If the intention is to delay RMDs as long as possible, whether your spouse is older or younger than you will determine the best option. If your spouse is younger, a spousal-inherited IRA might be a better fit because you can delay RMDs until after you reach your RMD age. If your spouse is older, treating the assets as your own might be better because you will not reach RMD age until after your deceased spouse would have, had they lived. For example:

Cathy passes away at age 63. Her husband, John, is 68 years old. If John chooses to treat the assets as his own, his RMDs will begin in five years when he turns 73. If he chooses the spousal-inherited option, he can wait 10 years to start RMDs, the year Cathy would have turned 73 had she lived.

Assuming the same information, except that John passes away, not Cathy. Cathy will want to treat the assets as her own so she can delay her RMDs until she turns 73 rather than starting RMDs sooner when John would have turned 73 had he not passed away.

The Ability to Change Course

If you choose to move your spouse’s assets into a spousal-inherited IRA in your name, you can always decide at a later date to treat the assets as your own and move them to your own IRA. The reverse scenario, however, is not true. Once you treat the assets as your own, the assets must remain in your own IRA; they cannot be transferred to a spousal-inherited IRA after the fact. For example:

Matthew is 55 years old and inherits his deceased wife’s IRA. He immediately puts the assets into his own IRA. Six months later, he needs to withdraw some funds to pay for childcare. Because the assets are in his own IRA and he is not 59?, the withdrawn funds will be subject to the 10 percent early withdrawal penalty. He does not have the option to move the funds to a spousal-inherited IRA to avoid the penalty.

A common strategy for spouses younger than 59? is to move some or all of the funds to a spousal-inherited IRA so that penalty-free distributions are available if needed. If you follow this course, once you reach age 59?, you can move the assets to your own IRA once you reach age 59?. Distributions would continue to be penalty free and RMDs would not be required until you turn age 73* —or not at all if the decedent had a Roth IRA and the spouse transfers the assets to their own Roth IRA.

Please note: Spousal-inherited RMDs are larger, so if you take this option, it is usually beneficial to treat the assets as your own before the year your spouse would have reached RMD age to ensure that you are taking the smallest possible RMD amounts.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer

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