If your spouse has died, what should be done with their IRA? To start, you have two options not available to other beneficiaries.
- Roll the decedent’s IRA into an IRA established in your name (spousal rollover)
- Elect to treat the decedent’s IRA as your own IRA (spousal election)
Under either of these options, the IRA account is now treated as your IRA. There are three major advantages to these two options if you are younger than 70½ and do not need to immediately take distributions.
- You can name your own beneficiaries and keep the account going longer. When you roll the account into your name, the account is now your IRA and required minimum distributions will be based on your lifespan. In addition, you can choose who your beneficiaries will be.
- Required beginning date for distributions may be deferred. You can defer receiving the required minimum distributions until you reach age 70½ which helps keep the account growing longer.
- More favorable required minimum distribution rules. With either of the above two options the IRA is treated as if you funded it which results in smaller required minimum distributions and a longer payout.
On the other hand, if you need or want to take distributions from your spouse’s IRA before you turn 59½, you should not make any changes. Why? Distributions before age 59½ from an IRA are typically subject to a 10% penalty. However, distributions from an “inherited” IRA are not. Leaving the IRA as your spouse’s account will give you the ability to withdraw funds penalty-free. In fact, you will be required to take an annual required minimum distribution (RMD) each year based on your spouse’s age at their date of death. Don’t forget to withdraw the RMD, or you will pay a penalty for not doing so.
Once you turn 59½, if you find you don’t need the money, consider rolling the IRA into your own IRA account as this can be done at any time after the date of death of your spouse.
As always, consult with your Henry and Horne tax adviser before making any changes.
Christina Henning, CPA