Inheriting an IRA From a Spouse

by Mark Kennan

    An inherited individual retirement account will never make up for the loss of a spouse. If you're the surviving spouse and your spouse was the original IRA owner, you may have additional options for managing an IRA inheritance. Knowing these options allows you to pick the one that allows you to keep the most money rather than having to share with Uncle Sam.

    Regular Beneficiary Options

    Even if you're the surviving spouse of the decedent and sole beneficiary of the decedent's IRA, you can still use one of the distribution options available to all IRA beneficiaries: either take minimum annual distributions each year until the account is empty, or liquidate the account before the end of the fifth year after the year the decedent died. For example, if you use the five-year option, if your spouse died any time during 2013, you would have to empty the account by Dec. 31, 2018. If you don't take the required distributions, you owe a 50 percent tax penalty on the amount you didn't take out.

    Special Spousal Option

    Besides the other options allowed, if you are the sole beneficiary of your spouse's IRA and are allowed to take unlimited withdrawals, you can elect to treat the IRA as your own. In essence, the Internal Revenue Service treats the IRA as if you were always the owner. If you inherit a Roth IRA and make this choice, you never have to take required minimum distributions. This allows you to delay taking any distributions from a traditional IRA until you turn 70-1/2-years-old.

    Delaying RMDs

    If you don't treat the IRA as your own, you can still delay RMDs until the year the decedent would have turned 70-1/2-years-old. For example, if the decedent spouse would have turned 70 1/2 in six years, you can delay your RMDs for six years even if you don't elect to treat that IRA as your own. Delaying RMDs allows you take advantage of the tax-sheltered growth of the IRA for a longer period of time.

    Combining IRAs

    Electing to treat the inherited IRA as your own allows you to combine the inherited IRA with your other IRAs through transfers and rollovers. Until you make the election to treat that IRA as your own, you can't mix and mingle the inherited IRA with your other IRAs or, if you inherited a traditional IRA, convert it to a Roth IRA.

    Election Warning

    Before you elect to treat the IRA as your own, consider if you will want any of the money before you turn 59-1/2-years-old. If you take distributions as a beneficiary, you won't have to pay the 10 percent early withdrawal penalty. However, this exception no longer applies once you've made the election to treat the IRA as your own. If you immediately elect to treat a traditional IRA as your own, you must wait until you turn 59-1/2-years-old before you can take withdrawals without a tax penalty.

    About the Author

    Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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