Understanding your options when you inherit an IRA is very important because IRA money generally has never been taxed. Death does not remove the tax liability. Any IRA money that is passed on to your heirs will be taxed when they take the money out of the shelter of the IRA.
IRAs must be in individual names and cannot be jointly owned, so many married couples name each other as primary beneficiaries so the survivor of the two will ultimately receive all the IRA assets. Rules for inheriting an IRA from a spouse are the most flexible and most favorable of all beneficiaries.
When the first spouse passes away, if the surviving spouse is the sole primary beneficiary, she has three different options to consider.
Option #1 – If the first to pass away has not yet reached the age when he must take required minimum distributions, the surviving spouse may choose to keep the money as an Inherited IRA in her spouse’s name. That way, she can delay any distributions until her deceased spouse would have turned 72. Then she will begin taking mandatory distributions based on her own life expectancy.
Options #2 – If the first to die is already receiving IRA distributions because he has passed the Required Beginning Date, the surviving spouse could keep the IRA registered as an Inherited IRA. She could take distributions either based on her own age or the age of her deceased husband. If the intent is to take only the minimum required, then using the age of the younger is best.
Option #3 – The surviving spouse has the option to roll over the IRA to her own IRA. A spouse is the only one who is allowed to do a rollover. A consideration before doing a rollover is whether the surviving spouse is under age 59 ½. If she rolls the IRA into her own name before age 59 ½ and she needs the money, there is a 10% early withdrawal penalty. If the money remains as an Inherited IRA as described in the first two options, then distributions may be taken at any time without any penalty.
If the surviving spouse keeps the IRA as an Inherited IRA she can always roll the money into her own IRA later. Once she does a rollover to her own IRA she cannot go back to an Inherited IRA.
The larger the IRA the more the spouse needs to be well-informed before deciding how to receive it. Call Guelich Capital to talk with an advisor before making a decision.
Written by Connie C. Guelich, CFP, AEP, CLU, ChFC. This represents our view at the time of this writing and is subject to change. This is not intended to be personal investment advice. If you would like to discuss your own account, please don’t hesitate to call us. We are here to help and welcome your call.