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Most married IRA account owners normally name their spouse as the beneficiary of the account.  Unfortunately, we do not always prepare ourselves for what happens when that inheritance occurs, and the last thing you want to deal with when your spouse passes is your IRA.  Hopefully, this article will help you understand what to do during this period where you may feel overwhelmed with your loss, so that you can help to secure your future.

Why Does it Matter if the Person I Inherit the IRA From is My Spouse?

Quite simply, because the IRS treats inherited IRAs from a spouse differently than when it is inherited from anyone else.  The differences in treatment provide more options to the widow in how they can treat the IRA.  Since the spouse does have more options, the first thing you need to do is to check who is listed as the beneficiary on the account, and if you want it to be your spouse, make sure it is them.  Not the name of your estate, even if that is going to be passed to your spouse, but just your spouse’s name.  To maximize the options available to your spouse, they must also be the only primary beneficiary listed. 

What are the Available Options?

For a spouse who inherits an IRA, they have two options they can choose from; to treat the IRA as if it is their own (spousal rollover), or to treat it as an inherited IRA.

Spousal Rollover

A spousal rollover is when the spouse elects to either transfer the IRA into their own IRA, or elects to treat the inherited IRA as their own.  Once the election is made, the inherited IRA is then treated as if it were always the spouses, ie the spouse is no longer the beneficiary, but is the IRA owner.  Many spouses will choose this option, because IRAs are subject to Required Minimum Distributions (RMDs), and they may be able to delay having to take the RMDs by electing to treat the IRA as their own.  This is not the case in all situations, and in those situations, the spouse may instead wish to remain a beneficiary of the inherited account.

Treating the IRA as an Inherited IRA

If instead of treating the inherited IRA as their own, the spouse can instead elect to treat it as an inherited IRA.  One scenario where this strategy can make sense is if the spouse is under 59 ½ and wants to use the funds in the IRA.  When it is your own IRA, withdrawals from the account before you are 59 ½ incur a 10% penalty as an early withdrawal, unless they fall under an exception.  However, inherited IRAs are an exception to this 10% penalty, so withdrawals from the account do not get hit with the 10% penalty. 

Required Minimum Distributions

RMDs are required by the IRS when the IRA owner turns 70 ½.  So, for a 60-year-old who inherits an IRA from their spouse, who was 65 at the time of death AND does the spousal rollover; RMDS would not be required to begin for another 10 years.  However, IRAs treated as an inherited IRA must begin RMDs when the original owner would have turned 70 ½.  So in the same example of a 60-year-old inheriting an IRA from their 65 year old spouse AND treating it as an inherited IRA, RMDs in this case would need to begin in 5 years.  It is also important to note, if the spouse who passes away has already turned 70 ½, the spouse who inherits the IRA and treats it as an inherited IRA, must take the RMD no later than 31 December of the year their spouse passed.  If the surviving spouse has not turned 70 ½ and does not take the RMD by 31 December, by default, the IRA will be treated as if the spouse had elected to treat it as his or her own.

Can You Change Your Mind?

Once you have decided whether to treat your spouse’s IRA as your own or an inherited IRA, can you change your mind?  Well, yes and no.  If you treat the IRA as an inherited IRA, you can always at a later date decide to roll it over and treat it as your own.  However, once you decide to treat the inherited IRA as your own, that decision is irrevocable, and it will always be treated as your own.

Going Forward

IRA rules can be complex and may seem overwhelming, especially at a time when you may be emotionally drained from losing a beloved spouse.  It is important though that you understand the laws and regulations and talk with a qualified financial advisor who can help guide you during this time so that the sacrifices, planning, and saving you and your spouse did is fully available for your benefit going forward.

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