IRA Options for a Surviving Spouse Under Age 59 1/2

As a follow-up to an earlier article on Options For a Spousal Inherited IRA, I wanted to address the specific situation that occurs if you, as a surviving spouse, have inherited an IRA from your spouse and you’re under age 59½. There are a couple of choices available to you – which can pose a dilemma.  As we have discussed in other articles, you have the option of leaving the funds in the original IRA (owned by your late spouse), which will allow you, as a spouse, to withdraw from the account at any time without penalty.  There is no 10% penalty for the withdrawal in this situation, as there would be with most other withdrawals before age 59½.  The downside to leaving these funds in the name of your deceased spouse is that, upon your death, the distribution options are usually unfavorable for that situation, and since you are not the original owner you can’t make changes.

On the other hand, as a surviving spouse you also have the option of moving the funds from the original account into an account in your own name – which will give you the flexibility to make changes to the distribution choices.  The problem with this move is that once you have moved the funds into your own account, the exception to the 10% penalty for early withdrawal no longer applies.  So, unless one of the other 72(t) exceptions applies you can not access the funds in the new, rollover account until you reach age 59½.

How to Deal With the Dilemma as a Surviving Spouse

How should you deal with the dilemma?  It depends completely on your specific situation, but below are some strategies you might consider:

If you would be in dire financial straits without access to funds from the IRA, leave it in your late spouse’s account, at least until you reach age 59½. Then later you can rollover the funds into your own account.  Since there is no deadline for this rollover, you have the flexibility to treat the account in this fashion.  If the event of your untimely death before rolling over the account would produce undesirable distribution of the remainder, you can address this by purchasing term life insurance with account proceeds, timing the insurance to expire upon your rollover.

If you’re well-to-do and don’t need funds from the IRA (okay, at least comfortable), or in ill health, you should not delay in rolling over the funds into your own account. This is because when you’ve made this move, you can be in control of the disposition of the account upon your death.  If for some reason you later need to access the funds in the account and you’re still under age 59½, you can either set up a Series of Substantially Equal Periodic Payments (SOSEPP) or use one of the other 72(t) exceptions if available.

What If the Account Requires Lump-Sum Distribution?

If there is a reason to leave the funds in the deceased spouse’s account but the account provisions require that you take a lump sum distribution immediately, you can roll over the account to an Inherited IRA, maintaining the original owner’s name, essentially acting as if you are a non-spouse beneficiary. This third option will give you the freedom to begin taking distributions (at least the Required Minimum Distributions, RMDs, but you can take more if needed) from the account, without penalty.  Then you can later rollover the funds into your own account at a later date when you no longer need the distributions or you reach age 59½.  This later rollover provides you with the option of receiving distributions in smaller amounts (no more RMD until 70½) and protecting the tax-deferred status as long as possible – in spite of the provision from the original account that required lump-sum distribution.