Hundreds of thousands of people are expected to inherit an IRA
this year. But a wrong step with an inherited IRA can be
IRA heirs often lose valuable tax deferral due to an
unintended distribution that triggers an unwanted tax bill, notes
Ed Slott, editor of the IRA Advisor newsletter.
But age and marital status can give retirees special benefits
with an inherited IRA.
A spouse often is the IRA beneficiary. A surviving spouse has
a unique opportunity: She can roll it over to her own name.
Say a hypothetical Deb Lee is the beneficiary of her husband
Al's IRA. When Al dies, she can roll the Al Lee IRA into a Deb
Deb Lee can do this whether or not she already has her own
Once Lee has rolled over the IRA, she can name any
beneficiaries she wants. And Lee can delay required minimum
distributions until age 70-1/2, if she's younger.
At 70-1/2, if Lee does not need more money, she can take only
RMDs, based on the IRS uniform lifetime table. That will allow
her to stretch out withdrawals for many years, extending tax
Once the account is in her own name, Lee can convert all or
part of her late husband's IRA money to a Roth IRA. No other IRA
beneficiary can do that.
But Lee may need to tap the IRA right away. If so, rolling it
to her own name can be costly.
If the IRA is in Deb Lee's name, she will owe a 10% penalty on
withdrawals before age 59-1/2, unless she qualifies for an
That penalty will be added to the ordinary income tax on IRA
Surviving Spouse Strategy
So a surviving spouse younger than 59-1/2 who needs payouts
should not roll the account into her own IRA. Instead, depending
on the custodian, it should be renamed something like "IRA of Deb
Lee, spousal beneficiary of Al Lee."
In most cases it can be retitled in the name of the deceased
spouse, for the benefit of the surviving spouse.
Then Deb can take withdrawals. She'll owe income tax but no
penalty, because of the exception for inherited IRAs. She can do
the rollover to her own IRA at 59-1/2.
The rollover permits her to name her own beneficiaries. She
might have her own children from a prior marriage, for instance.
It also lets her do a Roth conversion. And, if she no longer
needs to tap the IRA, she can skip or reduce withdrawals until
For nonspouse beneficiaries, distributions are taxable. They
can't take money from the IRA and put it back or re-deposit it
Nonspouse beneficiaries are not subject to the early
withdrawal penalty. But they must take RMDs, no matter how old
They can take more than RMDs, if they wish. But the less they
withdraw, the more tax-deferred growth they get.
Say Jim Able inherits an IRA from his father Ed. The inherited
account must be retitled, using both names. It could be "Ed Able
IRA, deceased, fbo (for the benefit of) Jim Able,
As a nonspouse, you can't combine an inherited IRA with your
own IRA. For maximum tax deferral, it's usually best to use the
IRS single life expectancy table. Only an original owner can use
the uniform lifetime table.
The single life table applies to inherited Roth IRAs and
inherited traditional IRAs.
If an IRA has more than one beneficiary, have the custodian
split it into an IRA for each heir by Dec. 31 of the year after
death. That provides separate investment tactics and RMD