Inheriting a Roth IRA From a Spouse: Which Option to Choose

Spouses who are the account’s sole beneficiary have the most and best choices

If you inherit a Roth IRA from your spouse, you will have options for handling the account that other kinds of beneficiaries don’t. Here’s how to choose the best one for your circumstances.

Key Takeaways

  • Spouses who inherit a Roth IRA from their spouse have several options for how to handle it.
  • If they are the sole beneficiary, they can designate themselves as the account owner and avoid required minimum distributions (RMDs) during their lifetime.
  • If they aren’t the sole beneficiary, they can roll over their portion of the assets into an inherited or a beneficiary IRA and stretch RMDs out over their life expectancy.
  • Roth distributions are tax-free as long as the account has been open for at least five years.

Inherited Roth IRA Options for Spouses

Unlike traditional individual retirement accounts (IRAs), Roth IRAs are not subject to required minimum distributions (RMDs) during the account owner’s lifetime. A person who inherits a Roth IRA also inherits some of that tax benefit. The specifics depend on the IRA beneficiary’s relationship to the deceased, with surviving spouses having the most—and best—options.

Spouses who inherit their spouse’s Roth IRA have several basic choices for what they do next.

1. Become the account holder

They can choose to become the account holder in what is called a “spousal transfer.” In this case, they won’t be subject to RMDs during their lifetime, but their beneficiaries will. To qualify for tax-free withdrawals, the account must meet the five-year holding period rule, and the surviving spouse must be at least 59½ at the time they make a withdrawal—just as if it had been their account in the first place.

Spouses are the only beneficiaries who can exercise this option, and they are eligible only if they are the sole beneficiary of the account. Otherwise, they must choose one of the next two options.

2. Roll it over into an inherited IRA

They can roll the inherited Roth IRA assets over into an inherited IRA, also known as a “beneficiary IRA.” In this case, the spouse will have to take distributions sooner or later, either based on their own life expectancy or, if they elect to, within a period of 10 years. The 10-year option might make sense if the beneficiary doesn’t want to start taking RMDs yet or if their life expectancy, based on the official IRS tables, would otherwise require them to empty the account in just a few years. Note that the so-called 10-year rule simply means withdrawing all the money from the account by the end of 10 years and doesn’t involve RMDs year after year.

For example, assume Wilma (age 69) inherits a Roth IRA from her late husband, Fred (age 73), and puts the money in an inherited IRA account. She could wait until she turns 72 to begin taking RMDs. At that point, she would calculate her RMD using the single life expectancy table found in Publication 590-B of the Internal Revue Service (IRS). In 2022, for example, a 72-year-old would have a single life expectancy of 17.2 years.

One potential advantage of opening an inherited IRA is that withdrawals aren’t subject to 10% early withdrawal penalties as long as the five-year rule has been satisfied. That can be helpful to surviving spouses under the age of 59½ who need access to the money.

This option also gives spouses an advantage over other beneficiaries, in many cases allowing them to stretch their RMDs out over more years. In the example above, Wilma would have about 17.2 years of RMDs. Also, because she’s 69 when she inherits the IRA, it would be three years before she has to begin taking them.  Spreading distributions over more years gives the money in the account more time to compound tax-free

By contrast, since the enactment of the SECURE Act in 2019, beneficiaries who aren’t spouses are generally required to deplete the account by the end of 10 years (or five years, in certain cases). The SECURE Act exempts spouses, along with several other groups, from the 10-year requirement, classifying them as "eligible designated beneficiaries."

3. Cash it out

They can take the money as a lump sum. As long as the account meets the five-year rule when the spouse inherited it, the distribution will be tax-free. Choosing this option could make sense for a younger spouse who needs the money immediately. The major caveat is that they may miss having it available to them later on—and lose the chance for the money to grow tax-free. 

Though the CARES Act waived RMDs for 2020, that waiver has expired for 2021 and thereafter.

How a Roth IRA Inherited From a Spouse Is Taxed

Roth IRAs continue to grow tax-free as long as the money remains in the account. This is true whether or not you are a spouse (and is one of the attractive features of using a Roth IRA for estate-planning purposes).

Distributions of the original account owner’s contributions aren’t taxed (because they were made with after-tax dollars), and distributions of account earnings are taxable only if the account doesn’t meet the five-year rule, as explained above. The 10% tax on early distributions applies only to IRAs for which a spouse has self-designated as the account owner.

Does an IRA Owner Have to Name Their Spouse as Beneficiary?

No. The IRS says that a beneficiary can be “any person or entity the owner chooses to receive the benefits.” That could be a relative who is not a spouse, a friend, a trust, the account owner’s estate, or a charity. An IRA can also have multiple beneficiaries.

How Does the IRS Define ‘Spouse’?

For federal tax purposes, a spouse is “an individual who is lawfully married to another individual.” Lawfully married means that the marriage is “recognized by the state, possession, or territory of the United States in which the marriage is entered into.” People married in a foreign jurisdiction are recognized as married for federal tax purposes “if the relationship would be recognized as marriage under the laws of at least one state, possession, or territory of the United States.” Both of those definitions would apply equally to opposite-sex and same-sex marriages. The law does not recognize as spouses individuals in a registered domestic partnership, civil union, or other similar formal relationship “not denominated as a marriage under the law of the state, possession, or territory of the United States where such relationship was entered into.”

What Happens if You Don’t Take RMDs?

Taxpayers who fail to take their RMDs are subject to what the IRS calls an “excess accumulation penalty.” It’s a 50% tax on the difference between the amount the person should have taken as an RMD and the amount (if any) that they did take. The IRS can waive all or part of the penalty if “you can show that any shortfall in the amount of distributions was due to reasonable error and you are taking reasonable steps to remedy the shortfall.”

The Bottom Line

Spouses have greater flexibility when they inherit a Roth IRA than other beneficiaries do, and they may be able to avoid RMDs during their lifetime, passing the account intact to the next generation. As is probably obvious from the discussion above, the rules on inherited IRAsboth Roth and traditional—are devilishly complex. They are also subject to change by Congress at any time, so if you inherit an IRA and enough money is involved, paying for expert professional guidance could be well worth it.

Article Sources

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  1. Internal Revenue Service. "Most Retirees Must Take Required Minimum Distributions by Dec. 31."

  2. Charles Schwab. "Inherited IRA Withdrawal Rules."

  3. Internal Revenue Service. "Publication 590-B (2020), Distributions From Individual Retirement Arrangements (IRAs): What if You Inherit and IRA?"

  4. Wealthspire Advisors. "What to Do if You Inherit an IRA Post SECURE Act."

  5. Internal Revenue Service. Publication 590-B (2020), Distributions from Individual Retirement Arrangements (IRAs): IRA Beneficiaries: 10-year-rule."

  6. Internal Revenue Service. "Required Minimum Distributions for IRA Beneficiaries."

  7. Federal Register. "Vol. 85, No. 219 / Thursday, November 12, 2020 / Rules and Regulations / 26 CFR Part 1 RIN 1545-BP11." Page 72477.

  8. Internal Revenue Service. "Retirement Topics — Required Minimum Distributions (RMDs)."

  9. American Society of Pension Professionals and Actuaries. "Remember RMD Requirements."

  10. Internal Revenue Service. "Retirement Topics Beneficiary."

  11. National Archives Code of Federal Regulations. "Title 26 / Chapter I / Subchapter F / Part 301 / Definitions § 301.7701-18."

  12. Internal Revenue Service. "Instructions for Form 5329." Page 8.

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