A spouse who inherits an IRA has a choice. The surviving spouse
can move the account into an inherited IRA to keep the tax shelter.
Or she can choose to roll the account into her own IRA.
The decision typically hinges on whether the surviving spouse
has turned 59 1/2 and whether her spouse had turned 70 1/2 before
he died. "Based on those two dates, it tells you what to do with
the account," says Jeffrey Levine, IRA technical consultant for Ed
Slott and Co., which provides IRA advice.
A spouse who is younger than 59 1/2 and needs the money would be
better off remaining a named beneficiary. If she rolls the money
into her IRA and then withdraws any of it, she'll pay a 10% penalty
until 59 1/2. Instead, if she remains a named beneficiary, she can
tap the account without penalty. To be a named beneficiary, she
must retitle the account as an inherited IRA.
But "she's not locked into that option," says Denise Appleby, of
Appleby Retirement Consulting, in Grayson, Ga. At any time, she can
roll the money to her own account.
A surviving spouse who is younger than 70 1/2 and doesn't need
the money generally should make the IRA her own. She won't be
required to take minimum distributions until she turns 70 1/2. "All
the rules apply as if she owned it since day one," says Ken Moraif,
a certified financial planner at Money Matters, in Plano, Tex.
Say a 74-year-old husband dies and passes his $500,000 IRA to
his 64-year-old wife. If she takes it as her own, she can wait six
years to take distributions. At 74, his required minimum
distribution would have been about $21,000, according to
's Beneficiary RMD Calculator (
). When she turns 70 1/2, her first RMD will be about $25,000, and
the account will have climbed to nearly $700,000 (assuming a 6%
annual growth rate).
The age of the account owner at death also could influence a
surviving spouse's decision. If the owner died before the date she
was required to begin distributions, a spouse who remains a named
beneficiary will not have to take distributions until the year that
his late spouse would have turned 70 1/2. (The "required beginning
date" for taking distributions is April 1 of the year after the
owner turns 70 1/2.)
Assume a 64-year-old wife leaves a traditional IRA worth about
$530,000 to her 74-year-old husband, and he keeps it as an
inherited IRA. Six years later, when his wife would have turned 70
1/2, he takes his first RMD of about $70,000, based on his own life
expectancy. At 90, he would have about $300,000 in the account.
If instead he takes the account as his own, he will take his
first distribution at age 75. He'll have to withdraw about $23,000.
Although he has to start distributions much sooner, the RMDs are
smaller and the account will last longer (assuming a 6% annual
return). At age 90, he would still have about $512,000.
If a late spouse had already started distributions, a survivor
who stays a named beneficiary can use either her own life
expectancy or her spouse's. If the survivor is older, she might
choose the late spouse's because it would be the longer of the two
life expectancies, Appleby says.
A survivor's decision to roll the IRA into her own or keep it as
an inherited IRA can have a big impact on the next generation. If
the IRA becomes your own, your beneficiaries can use their own life
expectancies to take distributions when they inherit the money.
Your beneficiaries can also "stretch" distributions over their
lifetimes if you kept the account as an inherited IRA but die
before your deceased spouse would have turned 70 1/2, Levine
But if you kept the account as an inherited IRA and you die
after you start RMDs, your beneficiaries will have to take RMDs
based on the life expectancy you were using. That means your
younger beneficiaries will have lost the chance to stretch the IRA
over their lifetimes.