Inheriting an IRA from a spouse? Make sure you know the rules.

When it comes to inheriting an IRA, spouses have more flexibility than other heirs. Here are the basic rules:

  • The surviving spouse may treat the inherited IRA as his or her own, roll it over into an existing IRA, or remain the beneficiary on the account.
  • As a surviving spouse, you may only treat the IRA as your own if you are the sole beneficiary. If there are multiple beneficiaries, the account can be separated so the spouse's share is in its own account.

If you elect to treat the IRA as your own, the IRA is simply retitled as the spouse's IRA. As an alternative, you can roll the balance over to your own IRA. Since the account is then considered the yours, you can then name your own beneficiaries. Withdrawals are subject to a 10 percent federal income tax penalty if you have not reached age 59 1/2 and you must start taking required minimum distributions (RMDs) at age 70 1/2. RMDs are calculated using the uniform IRS table, which assumes a joint life expectancy with the beneficiary considered 10 years younger.

  • If the surviving spouse remains the beneficiary of the IRA and is the sole beneficiary, distributions are required by the later of the year the original IRA owner would have reached age 70 1/2 or by December 31 of the year following the IRA owner's death. If the spouse is not the sole beneficiary, then distributions must begin by December 31 of the year following the IRA owner's death.
  • Required distributions are calculated based on the single life expectancy table for beneficiaries. However, spouses recalculate their life expectancies every year by looking up the factor on the IRS table. Non-spouse beneficiaries get the life expectancy figure from the table in the first year, but in each subsequent year, they reduce the factor by one year. Since the table assumes a single life expectancy, distributions would be higher than if the spouse treated the IRA as his or her own.

Although lower RMDs are required when a spouse rolls over or treats the IRA as his or her own, there are circumstances when the spouse might want to remain the beneficiary:

  • A spouse under the age of 59 1/2 can make withdrawals from the beneficiary account using the life expectancy table, without paying the 10 percent federal income tax penalty. Once the account is rolled over, withdrawals before the age of 59 1/2 would result in a 10 percent federal income tax penalty.
  • A spouse who is significantly older than the deceased IRA owner can delay RMDs by remaining the beneficiary. He or she would not have to take RMDs until the deceased spouse would have reached age 70 1/2, even if the surviving spouse is already past age 70 1/2.
When a Roth IRA is involved, the surviving spouse would normally want to roll the Roth IRA over or treat it as his or her own. Then, no distributions would be required during his or her lifetime. If the surviving spouse remains the beneficiary, then distributions would be required as described above for traditional IRAs.

Finally, depending on the provisions in your spouse's will or trust, and the total value of all of your assets, it may make sense to disclaim the IRA to save estate taxes at your death.  With a properly worded will or trust, you can still use the IRA during your life time. Consult with your estate planning attorney for more information.

From TrustCounsel's Jume 22 email newsletter.

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