What A Younger Spouse Should Do When Inheriting an IRA

By Beverly DeVeny, IRA Technical Expert

Follow Me on Twitter: @BevIRAEdSlott

Richard has an IRA and has named his wife Diane as the beneficiary. Richard dies unexpectedly at age 52. Diane is 50. What should she do with Richard’s IRA?

This is a case when the spouse should probably remain a beneficiary of the IRA. Here’s why.

A beneficiary does not have to pay the 10% early distribution penalty on amounts withdrawn from the inherited IRA. If Diane needs to use IRA funds for any reason, she can take as much or as little as she wants and only pay income tax on the amounts she withdraws. She will not owe the 10% penalty. If Diane moves the inherited IRA into her own name, however, she will owe the penalty – unless one of the exceptions to the penalty applies.

A spouse beneficiary does not have required minimum distributions (RMDs) until the deceased account owner would have been 70 ½. Diane will have no RMDs until Richard would have been 70 ½ – 18 years from now. If she does not need any funds from the IRA, she can leave them in the account to continue to grow and compound, tax deferred.

Once Diane reaches the age of 59 ½, when she will no longer be subject to the 10% early distribution penalty on funds in her own retirement account, she can move the inherited IRA into an IRA in her own name. There is no deadline for a spouse to do this. She can make the IRA her own even if she has regularly taken funds out of the account.

Diane should be sure to make the funds her own before the year Richard would have been 70 ½. Here’s why.

Diane, as a beneficiary, would have to use the Single Life Table for calculating her RMDs from the inherited IRA. The RMDs would be larger each year than they would be if Diane owned the account and used the Uniform Lifetime Table. As a result, Diane would be paying more in income tax each year, and she would be depleting the account at a faster rate than she would have to if the account was an owned account.

Plus, Diane’s beneficiaries of the inherited account would not be able to use their own life expectancies at Diane’s death. Instead, they would have to continue using Diane’s life expectancy. Her beneficiaries would be successor beneficiaries – a beneficiary’s beneficiary. They would not be an original beneficiary. As a result, the annual distributions would almost certainly be larger, the beneficiaries would owe more in income tax each year, and the account would be depleted at a faster rate.