The short answer is "yes." According to the rules for inherited IRAs, you can roll a deceased taxpayer's individual retirement account over to a spouse. In fact, it is not so much a question of "can you do this?" as it is a matter of "how should you go about doing this." Several options exist, and it's important to consider the implications of each—keeping in mind the required minimum distribution (RMD) rules, as well.
What Are the Rules Regarding Inherited IRAs?
Let's say that the owner of an IRA turns age 72—which, as of 2020, is the Internal Revenue Service's required beginning date (RBD) for distributions—and he starts withdrawing funds from his account. A year later, this retiree dies. His wife survives him and, as the account's designated beneficiary, inherits his IRA. She is only 69 years old.
The SECURE Act of 2019 pushed back the age at which retirement plan participants need to start taking required minimum distributions (RMDs), from 70½ to 72—for account holders who had not turned 70½ by the end of 2019. For those who already had, 70½ remains the RMD required beginning date.
The CARES Act of 2020, passed in March of 2020, amid the COVID-19 pandemic, put a hold on RMDs for the remainder of 2020.
Spousal beneficiaries basically can treat an inherited IRA as their own. If they are beyond the age of 59½, they are free to take out as much of the inherited account as they want at any time, without penalty; in fact, they may take out all of the funds at once, as a lump sum. Doing so would incur a big tax bill, though, if it's a traditional IRA, whose distributions are fully taxable. Let's look at some other options.
Rolling Over an Inherited IRA
In this case, the wife does want to treat the IRA as her own, especially since she is not yet 72, and so RMDs are still several years off. She can accomplish this by naming herself as the owner of her husband's IRA (technically, the old account is transformed into an inherited one, with a name like AMANDA SMITH INHERITED IRA BENEFICIARY OF HERBERT SMITH). Or, if she already has her own IRA, she may combine the husband's funds with her assets, by rolling them over into her account.
This sort of rollover—a privilege that is unique to spousal beneficiaries—would enable a spouse to do the following:
- Make contributions to the account if they are eligible—that is, if they have earned income and are less than age 72, in the case of a traditional IRA
- Name their own beneficiaries
- Postpone RMDs until they reach age 72, again in the case of a traditional IRA
The rollover is a good choice for the wife in question. Because her husband was older than her, she's able to delay taking the RMDs, as she wished.
Rolling over an IRA is not an all-or-nothing decision. You can parse the account and roll over some of it to your own IRA, leaving the balance in the account you inherited. However, there’s no changing your mind once you divvy up the funds: You can't return the rolled-over amount to the inherited account.
Also bear in mind that, once the funds are in your own IRA, they're subject to all the regular IRA rules. Let's say you're widowed at age 57. Your deceased spouse was 63. You roll over inherited IRA funds into your own IRA. If you then take these funds from your account before you reach age 59½, you’ll be subject to a 10% penalty on early withdrawals—even though the money originally came from an account whose owner was beyond the penalty age. (This assumes you don't qualify for some other exception to the penalty).
- Spousal beneficiaries of IRAs have several options, some of them unique.
- Widows and widowers can roll over inherited IRA funds into their own IRAs.
- If required minimum distributions must be taken from the inherited IRA, widows and widowers can calculate them based on their own life expectancies.
- Spousal beneficiaries can also empty an inherited IRA on a five-year schedule.
The Five-Year Rule
Other strategies exist for avoiding RMDs. Let's say you inherit an IRA that, for whatever reason, you don't wish to roll over. If the owner had not yet chosen an RMD schedule or had not turned 72, you may postpone taking any 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. Let's say that the husband died in April 2020. If his wife-beneficiary uses the five-year rule method, then she must withdraw all of the funds by Dec. 31, 2025.
Within the 5-year window, recipients may continue to contribute to the inherited IRA account. When those five years are up, however, the beneficiary would have to withdrawal all of the assets.
The Life Expectancy Method
Let's say you inherit an IRA whose deceased owner had started taking RMDs. Unless you roll the account over, 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 own life expectancy (calculated by using the IRS Single Life Expectancy Table). Obviously, this approach works mainly if, as in our example, the surviving spouse is younger than the deceased. If the deceased were younger, it would behoove you to stay with their rate.
Once this option was 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.
Special Considerations for Inherited IRAs
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. However, the spouse may distribute their portion of the assets to their own IRA and need not begin distributions until their RBD.
The Bottom Line
However you decide to handle your inherited IRA, it's important to be aware of all of the rules surrounding RMDs. Knowing them can help you avoid making some costly mistakes, and devise the most advantageous strategy for preserving IRA assets and their tax-deferred growth.