What Happens When I Inherit my Spouse’s IRA

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When a spouse passes away and leaves an IRA to the surviving spouse, they also leave a spouse with a choice: Should they make the IRA their own IRA or should they maintain separate IRAs? Read this Periscope to learn more, and then discuss these questions with your financial planner.

Make the Inherited IRA a Surviving Spouse’s IRA

The surviving spouse has a choice to make: to have one IRA or keep a separate inherited IRA? 

If a surviving spouse has an IRA already, they might choose to combine the decedent’s IRA into their own IRA. If the surviving spouse does not have an IRA, they can choose to turn the decedent’s IRA into their own IRA. Importantly, most surviving spouses choose to have one IRA.

One big advantage of combining IRAs is less paperwork and less hassle. This also simplifies required distributions. The spouse has only one required distribution schedule to remember. If the spouse were to choose to keep a separate spousal inherited IRA, they would have two distribution schedules: one for their own IRA and one for the inherited IRA. 

Note that multiple accounts usually do provide additional investment advantages. When a spouse inherits an IRA, less is more. One IRA is less complicated than multiple.

Keep the IRAs Separate From Each Other

Another option for the surviving spouse is to keep separate IRAs. The surviving spouse turns the decedent’s IRA into an inherited IRA. Distributions from a traditional inherited IRA are income taxable to the surviving spouse. If it is a Roth IRA, distributions are tax free!

A spouse who keeps an inherited IRA must make a Lifetime Expectancy Payment, LEP. For a inheriting spouse, and only a spouse, they have special rules to consider.

Spousal LEP rules depend upon whether the decedent was already required to make distributions before they passed. The distribution age today is 73; this is called the required beginning date (RBD). This age was recently changed by Congress and may change again, so make sure to talk with your financial planner. 

If the decedent was over the required distribution age, then the surviving spouse must make distributions beginning the very first year after death. However, if the decedent was under the age when they had to make required distributions, then the spouse has a choice. They can either make or defer distributions as long as possible.

For spouses who choose to keep an inherited IRA, minimal distributions (the LEP) must start by the decedent’s RBD. In other words, had the spouse been alive, they would have made a minimal distribution; the spouse must now make that distribution the same year.

Usually a spouse chooses to keep an inherited IRA when they are in one of two situations: when the survivor is young or when the survivor is significantly older than the decedent.

Young Spouse Wants Access to the Money 

A surviving spouse may want access to a decedent’s IRA before they turn age 59 ½. If so, they may benefit from an inherited IRA. A surviving spouse under the age of 59 ½ can choose to make distributions from an inherited IRA without the penalty tax! IRAs require a 10% early withdrawal tax penalty plus income taxes owed. However, an inherited IRA does not impose a 10% penalty tax.

The spouse with a spousal inherited IRA retains the power to choose whether or not to make a distribution every year until the decedent would have had to make the first minimal distribution. After that, the surviving spouse must make the LEP. These may be compelling reasons to consider a spousal inherited IRA. 

On the other hand, many spouses want to continue tax deferral and use the IRA for retirement. In this case, it makes sense to make the decedent’s IRA their own. They would be able to continue tax deferral until their own required beginning date. Plus, a spouse might prefer less complexity.

Older Spouse Wants to Delay As Long As Possible Taxable Distributions

This example is the converse of the prior situation. For a spouse who is considerably older than the decedent, they may want an inherited IRA. They will be able to use the age of the decedent to determine the LEP. If they are in a high tax bracket, saving taxes can be a compelling reason to take on the extra work required of keeping track of an additional IRA.

In Conclusion

A person who inherits an IRA from a spouse has a choice to make: to make the IRA their own IRA or to create a separate spousal IRA. Most people choose the less complicated route and to have as few IRAs as possible. The exceptions usually fall into two categories: young spouses who want access to the IRA funds or older spouses in higher tax brackets who want to defer taxes as long as they possibly can.

The tax information contained in this article is general in nature. Always consult an attorney or tax professional regarding your specific legal or tax situation.


About the author

Karl Frank, Certified Financial Planner ®, MSF, MBA, MA, is the President of A&I Financial Services LLC, a local business that specializes in wealth management, insurance planning, and retirement planning. Karl cares for business owners and the businesses that care for them. Learn More about Karl.