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What Options Are Available for a Surviving Spouse Who Inherits an IRA?

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First Spouse Program bronze medal (Photo credit: Wikipedia)

When the owner of an IRA dies and leaves the IRA to his or her spouse as the sole beneficiary, there are some unique options available for handling this inherited IRA.  Keep in mind that these options are only available to a spouse a beneficiary – a non-spouse beneficiary has much more limited options available.

Options for a Spousal Beneficiary of an IRA

The first and easiest option is for the spouse to leave the IRA exactly where it is and do nothing.  In this manner, the IRA will continue to exist as belonging to the deceased spouse – for a time.  If the deceased spouse was over age 70½ years of age and subject to Required Minimum Distributions (RMDs), the surviving spouse could elect to continue receiving those RMDs using his or her late spouse’s lifetime as the distribution factor.

On the other hand, if the deceased spouse was not subject to RMDs, the surviving spouse could also begin receiving RMDs from the inherited IRA based upon his or her own age.  This is a viable option as well.

On the third hand, after leaving the IRA in the name of the deceased spouse the surviving spouse could also opt to not take RMDs from the account at all – in this case the inherited IRA would be considered to be owned by and controlled by the surviving spouse, no longer an inherited IRA.  If the surviving spouse is over age 70½, he or she will need to begin receiving RMDs from the account based on his or her age.

Another option available to a spousal beneficiary of an IRA is to rollover the account into an IRA in his or her own name.  This would give the surviving spouse the same result as the “third hand” mentioned above.

In other words, both of these last two options results in the IRA being treated as if it was owned by the surviving spouse.  He or she is eligible to make contributions to the account, take withdrawals if over age 59½ (or if one of the exceptions applies) without penalties, rollover the account to another IRA or Qualified Retirement Plan, and convert the account to a Roth IRA.

Why Would the Spouse Choose One Option Over Another?

In some instances, it could be advantageous to leave the IRA in the name of the deceased spouse.  For an example, let’s say Jane died leaving John (her husband) as the sole beneficiary of her IRA.  Jane was 70 years old and not yet subject to RMD, but eligible for penalty-free distributions.  John is 57 years old, and as such he’s not yet eligible to take IRA distributions from a regular IRA in his own name.  Once the time has passed when Jane would have reached age 70½, John will be subject to RMDs from the account based upon Jane’s age (since it’s still in her name) but if he needs the income he has it available without penalty.  If he rolls over the account to his own name at age 57 he will not have penalty-free access to the funds for 2½ more years.

So, leaving the account in Jane’s name will allow John to take withdrawals from the account without penalty.  Once John reaches age 59½ he can rollover the account to an account in his own name, which will allow him to name beneficiaries of the account on his own (otherwise the original beneficiary designations that Jane made are still controlling the account).

Another situation that might make sense for the surviving spouse to leave the account in the name of the deceased spouse is if the surviving spouse is older.  From our example, if Jane and John’s ages were switched (Jane, the deceased was 57 and John is 70) then John could benefit from leaving the account in Jane’s name. This is because he could take distributions from the account without penalty (death benefits are penalty-free) without being required to take distributions (when he reaches 70½).

At the point in the future when Jane would have been age 70½, John could rollover the IRA into an account in his own name, again so that he can name his own beneficiary for the account.  This way he didn’t have to take RMDs until that point.

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2 Comments

  1. Robert HardekopfNo Gravatar says:

    Are there not other considerations relating to which table must be used for RMDs? For example, if one wants to minimize RMDs (both spouses > 70.5) I have read that inherited IRAs must use the single life table while if it is rolled over to the surviving spouse he or she can use the uniform life table. Also, what about income tax implications if the surviving spouse (now filing as single) is pushed into a higher tax bracket? If spouse does not need the extra income, what are the considerations on leaving the IRA to children who may be in a lower tax bracket? These are complicated decisions!

    1. jblankenshipNo Gravatar says:

      Robert – yes, as you’ve pointed out, there are many additional items to consider when choosing beneficiaries and how the beneficiary (spouse or otherwise) should handle the account. This article was not intended to cover chapter and verse of every possible factor, only options available and some things to consider with those options.

      jb