According to the rules for inherited IRAs, a deceased taxpayer's individual retirement account can be rolled over to a spouse. Several options exist to accomplish this, and it's important to consider the implications of each, especially the required minimum distribution (RMD) rules.
- Surviving spouses can roll over inherited IRA funds into their IRAs.
- If required minimum distributions must be taken from the inherited IRA, widows and widowers can calculate them based on their life expectancies.
- Spousal beneficiaries can also empty an inherited IRA on a five-year schedule.
What Are the Rules Regarding Inherited IRAs?
Spousal beneficiaries can treat an inherited IRA as their own. If beyond the age of 59½, they can withdraw from the inherited account at any time, without penalty. Doing so will incur a tax bill if it's a traditional IRA, whose distributions are fully taxable. If the account is a Roth IRA, the distributions are not taxed.
A traditional IRA also holds a provision for required minimum distributions (RMDs). As of 2023, the required minimum distribution age is 73 and will increase to age 75 in 2033.Roth IRAs do not contain an RMD provision.
Rolling Over an Inherited IRA
If the spouse treats the IRA as their own, they can accomplish this by naming themselves as the owner of their spouse's IRA. The old account is transformed into an inherited one, with a name like AMANDA SMITH INHERITED IRA BENEFICIARY OF HERBERT SMITH.
If the surviving spouse already has their own IRA, they may combine the spousal funds with their funds, by rolling them over into their account. This sort of rollover is a privilege unique to spousal beneficiaries and enables a spouse to do the following:
- Make contributions to the IRA if they have earned income and are less than age 73, in the case of a traditional IRA
- Name their beneficiaries
- Postpone RMDs until they reach age 73 with a traditional IRA
Rolling over an IRA allows you to parse the account and roll over some of it to your own IRA, leaving the balance in the inherited account. However, you can only decide how to distribute the funds once at the rollover.
Once the funds are in your own IRA, regular IRA rules apply. If you take these funds from your account before you reach age 59½, you are subject to a 10% penalty on early withdrawal even though the money came from an account whose owner may have been beyond the penalty age.
The Five-Year Rule
A strategy exists to avoid RMDs on traditional IRAs. If you inherit an account where the owner had not reached age 73 and had yet to take the required minimum distributions, you may postpone annual distributions as long as you empty the account by the end of the fifth year after the original owner's death.
This is called the five-year rule. Within the 5-year window, recipients may continue to contribute to the inherited IRA account. When the five-year window ends, the beneficiary has to withdraw all of the assets.
The Life Expectancy Method
If you inherit an IRA whose deceased owner had started taking RMDs, you have to take them too. However, you don't have to take them at the original owner's rate. Instead, you can recalculate the annual amount using your life expectancy calculated using the IRS Single Life Expectancy Table.
This approach works well if the surviving spouse is younger than the deceased. This option was once open to non-spousal beneficiaries, too, but the SECURE Act of 2019 changed that. Now, non-spousal beneficiaries must empty Inherited IRAs within a decade of the deceased's death.
What If Both a Spouse and Non-Spouse Inherit an IRA?
The spousal beneficiary options apply only if the spouse is the sole primary beneficiary of the IRA. If the spouse is one of several primary beneficiaries, then the spouse may be subject to the non-spousal beneficiary options should they choose to keep the assets in an inherited IRA.
When Did the Age Requirement Change For IRA Required Minimum Distributions?
For traditional IRA accounts that have an RMD provision, the SECURE 2.0 Act of 2022 increased the required minimum distribution age from 72 to 73, beginning on January 1, 2023. The age threshold increases to 75 beginning in 2033.
How Much Can a Spouse Contribute to an Inherited Spousal IRA?
As of 2023, spousal IRAs have the same annual contribution limits as any other IRA, $6,500. A $1000 catch-up contribution is allowed for those over age 50.
The Bottom Line
However you handle your inherited IRA from your spouse, be aware of the rules surrounding RMDs. Knowing them can help you avoid making costly mistakes, and devise the best strategy for preserving IRA assets and their tax-deferred growth. Surviving spouses have many options that include rolling over inherited IRA funds into their IRAs, assuming the old account, or depleting the account within five years.