IRA Rollover Rules for a Spouse Beneficiary

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Spouses who inherit IRAs have special benefits under IRS rules not available to non-spouse beneficiaries. Spouses may rollover an inherited IRA to their own retirement account or treat an inherited IRA as their own account. A spouse beneficiary must decide how to address an inherited IRA before distributions are received. This is especially important if the distribution is a minimum required amount of the deceased spouse. These required distributions cannot be rolled over—even by a spouse beneficiary.

Rollover IRA

Spouse beneficiaries may rollover inherited IRAs to their own IRAs or to any other qualified retirement account, such as one provided by an employer. The amounts in the inherited IRA thus become subject to tax rules as if the inheriting spouse had established the account for herself. No distributions are required from the inherited IRA. Instead, distributions are based on the rules for the surviving spouse. Required minimum distributions begin at age 70½. Tax penalties exist for distributions taken before age 59½ .

Spouse's IRA

A surviving spouse is not required to rollover an inherited IRA. A spouse can treat an inherited IRA as his own account. He designates himself as the IRA owner with the financial institution that is custodian of the account. This is the default option under the tax rules if the spouse is the sole beneficiary with an unlimited right to withdrawals. A spouse will be automatically treated as the new owner of the IRA if he makes any contributions to the IRA, does not rollover the IRA or fails to take required distributions as a beneficiary.

As the IRA owner, the surviving spouse determines required minimum distributions based upon his age. Distributions are required if the surviving spouse is age 70½. The surviving spouse is not required to take distributions until he reaches that age. However, if the surviving spouse does take distributions, they are subject to early withdrawal penalties if he is not yet age 59½. Therefore, a spouse under age 59½ who desires distributions should take them as an IRA beneficiary instead of as account owner.

Beneficiary IRA

A spouse may elect to treat an inherited IRA as if she were a non-spouse beneficiary. The surviving spouse may take penalty-free distributions from the IRA based upon her life expectancy or may simply withdraw the entire account balance by the end of the fifth year after the IRA owner’s death. No distributions are required until the end of the fifth year. However, if the spouse does not take annual distributions, the entire IRA must be withdrawn by the fifth year. Therefore, a spouse who does not desire distributions within five years—or wishes to minimize distributions that are required based upon her age—should treat the inherited IRA as her own account or roll over the IRA.