What Every Spouse Needs to Know About Inheriting IRAs

Inheriting an individual retirement account (IRA) can have some unforeseen pitfalls, and a few of the potential mistakes (and steps to avoid them) depend on if the beneficiary is a surviving spouse or another type of beneficiary. There are several solutions to this problem, depending on the tax or retirement goals of the individual inheriting the IRA.

An often unattractive option from a tax planning perspective, a person can distribute all of the IRA assets within five years of the original IRA owner’s death. The distributions will be included in gross income and taxed in the same way they would have been to the original owner, but if there is a need for cash, it needs to be considered.

A more appealing option for some is that of establishing an inherited IRA. This is accomplished by changing the legal name of the IRA and having the title include the name of the original owner, the fact that the original owner is deceased, “for the benefit of,” and the name of the inherited owner. Each custodian may have its own particular wording, so be aware. For non-spousal beneficiaries, the required minimum distributions (RMDs) must begin by December 31 of the year following the original IRA owner’s death. For spouses, it can wait until the deceased spouse would have turned 70 1/2, or the surviving spouse can use their life expectancy.

Surviving spouses have the option of using the spousal rollover. In essence the spouse can distribute all of the assets of the deceased spouse’s IRA into their own IRA or a new IRA for that purpose. The IRA is treated as if the surviving spouse was the original owner.

See Bob Carlson, What Every Spouse Needs to Know About Inheriting IRAs, Forbes, September 18, 2018.

Comments are closed.