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Spouse Beneficiary of an IRA

by Craig Moser on November 24, 2017

Your spouse passed, and you find you become the spouse beneficiary of an IRA.  The IRA custodian automatically retitles the account as an inherited IRA.  Besides, wouldn’t they do what’s best for you?  Should you leave it that way, or should you move the assets to your own IRA?

You can move the inherited IRA funds from your spouse’s account to your own IRA at any time.  However, once you move the money to your own account, you can’t go back to the inherited IRA.    So, be sure it’s the right move for your situation before taking this step.

As with many retirement savings decisions, the decision of an inherited vs. an owned IRA depends primarily on age.  Your age, and the age of your spouse at their death.  To help you decide, here are the options for spouse beneficiaries named on IRA account forms.  (There are difference choices and rules for non-spouse beneficiaries and spouses who inherit through an estate.)

Surviving Spouse is Under Age 59 ½

Generally, if you are under age 59 ½, you should keep the IRA as an inherited IRA, at least for a while.  Distributions to a beneficiary aren’t subject to the 10% early distribution penalty regardless of age.  You can take distributions from the inherited IRA at any time.  You owe income tax on any pre-tax amounts withdrawn from the inherited IRA.

Required minimum distributions (RMDs) from the inherited IRA aren’t due until the year your spouse would have turned 70 ½.  At that time, RMDs are calculated using the Single Life Expectancy Table.  After you reach 59 ½, you should consider moving the inherited IRA to your own IRA.  At this age, the 10% penalty is no longer a concern.  (You should also name your own beneficiary on the inherited account.)

Surviving Spouse is Over 59 ½

Many surviving spouses over age 59 ½ move the inherited IRA to an IRA in their own name.  You don’t start RMDs until the year you turn 70 ½.  In the meantime, you can take distributions from your IRAs at any time, in any amount, whenever you want to.  You owe income tax on pre-tax amounts withdrawn, but you aren’t subject to the 10% early distribution penalty.

Remember to name your own beneficiary on any new IRA accounts.  If you move the inherited money to an existing IRA in your name, be sure to update the beneficiary form on that account if necessary.

Surviving Spouse is Over 70 ½

The determining factor in this scenario depends on the age of your deceased spouse.

When the deceased spouse is older than you, inherited funds are usually moved to your IRA account.  This lets you consolidate accounts, and RMDs are lower because your age is used to calculate the amount.

If the deceased spouse is younger than age 70 ½, you may want to keep the IRA as an inherited IRA, at least for a while.  You don’t take RMDs on the inherited IRA until the deceased spouse would have turned 70 ½.  This reduces your RMDs in the short term.

In the year before the deceased spouse would have turned 70 ½, you should transfer the inherited IRA to your own IRA.  The RMD calculation uses the combined IRA balances, your age, and the Uniform Lifetime Table.  This table produces a lower RMD than  the Single Life Expectancy Table  used if the IRA remains an inherited IRA.

Again, name your own beneficiary on any new IRA accounts.  If you move the inherited money to an existing IRA in your name, be sure to update the beneficiary form on that account if necessary.

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