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George F. Bearup, J.D. Senior Legal Trust Advisor

24-Nov-21

Spouse as IRA Beneficiary

Take-Away: A surviving spouse as a designated beneficiary of a deceased spouse’s IRA has some options with regard to taking distributions from the inherited IRA, options that are not available to other non-spousal beneficiaries of inherited IRAs.

Background: I received a couple of inquiries in the past few weeks confirming the basic the options that a surviving spouse has when he/she is the designated beneficiary of their deceased spouse’s IRA. While this topic was covered in the past, this should be considered a ‘refresher’ of the earlier missive, especially after the SECURE Act became law. What may appear to be a simple decision by the surviving spouse may, in fact, become a complicated decision for the survivor due to the options they must consider. Some of the basic options involve the following:

  • Inherited IRA: If the surviving spouse will need access to the IRA dollars and the survivor is under the age of 59 ½, then establishing an inherited IRA and taking distributions is the best option. The reason is that the survivor can access the inherited IRA through distributions without incurring the 10% early withdrawal penalty. The surviving spouse is an eligible designated beneficiary under the SECURE Act, so that he/she may take required minimum distributions from the inherited IRA using their own life expectancy under the Uniform Lifetime Tables. While these required minimum distributions (RMDs) are taxable to the survivor, they will, in general, be very small amounts. If the surviving spouse is more than 10 years younger than the deceased spouse, then the Joint Life Table is used to calculate the survivor’s annual required minimum distributions, which provides an even smaller amount of taxable income.
  • Rollover IRA: A surviving spouse is the only designated beneficiary who can do an IRA rollover, moving the funds from the inherited IRA to the survivor’s own IRA. A spousal rollover is not a taxable event. This rollover can take the form of a custodian-to-custodian transfer without a distribution to the survivor. Or, the surviving spouse can actually withdraw the funds from the inherited IRA, and so long as the withdrawn funds are transferred into the survivor’s own IRA within 60 days, no income tax will be imposed. Only a surviving spouse can do a 60-day rollover without any tax consequences; all other non-spousal beneficiaries of inherited IRAs cannot do a 60-day rollover as all distributions from an inherited IRA by a non-spouse designated beneficiary are subject to immediate income taxation.
  • Inherited-to-Rollover: An inherited IRA for a surviving spouse is not a final decision. At any age the survivor can do a spousal rollover and combine the inherited IRA with their own IRA. Normally this rollover occurs only after the survivor attains the age 59 ½ when distributions from one’s own IRA is no longer subject to the 10% early distribution penalty.

Example:  Mary dies leaving her husband Charlie. Charlie is age 30 when Mary died in a car accident. Charlie can choose an inherited IRA and have penalty-free access to Mary’s IRA, which he may need in order to continue to pay the mortgage on their recently purchased home. Charlie takes required minimum distributions as an eligible designated beneficiary using his own, long, life expectancy from the inherited IRA. At age 59 ½, almost 30 years later, Charlie then can make a spousal rollover of the balance of the inherited IRA to Charlie’s own IRA,  an age when Charlie will not be subject to the 10% early distribution penalty, should Charlie need access to the funds. Charlie, after the rollover, will no longer have to take RMDs since the inherited IRA will no longer exist, and Charlie will have roughly 12 more years before he will then have to begin taking RMDs from his own IRA beginning at age 72.

Conclusion: Factors for a surviving spouse to consider who has been named as the designated beneficiary of their deceased spouse’s IRA include: (i) the age of the deceased spouse; (ii) the age of the surviving spouse; (iii) the type of IRA that is inherited, i.e. traditional v Roth; and (iv) the survivor’s probable need to access the funds in the inherited IRA to support themselves or pay bills. The real take-away is that a surviving spouse, who is emotional and probably not thinking straight after the loss of their spouse, should not make a knee-jerk decision to make a rollover of the inherited IRA without thinking through their options. Perhaps the survivor rolls over only a portion of the IRA (delaying RMDs) while retaining some of the funds in an inherited IRA until they have a much better idea of whether they will need to access the inherited IRA (subject to RMDs, taxable, but 10% penalty-free) to pay bills. Obviously, this flexibility is only available to a surviving spouse who is named as an eligible designated beneficiary of the deceased spouse’s IRA.