When a spouse inherits an IRA, the decisions they face can be overwhelming and carry significant long-term consequences. Mistakes made during this process can’t be undone, so it’s crucial to understand your options and make informed choices. Today, we’re diving into the unique rules and strategies for spouse beneficiaries of inherited IRAs to help you navigate this challenging time.
Why Spouse Beneficiaries Have Unique Options
Under the Secure Act of 2020, the rules for IRA beneficiaries changed, categorizing them into three groups: non-designated beneficiaries, non-eligible designated beneficiaries, and eligible designated beneficiaries. Spouses fall into the last category and enjoy the most flexibility. These rules are designed to ensure that the IRA continues serving its primary purpose: providing financial security for the surviving spouse.
Spouses have two primary choices:
- Treat the IRA as inherited – This allows withdrawals without the 10% penalty if the surviving spouse is under age 59½.
- Roll the IRA into their own account – This may simplify future planning and enable strategies like Roth conversions but could trigger penalties for early withdrawals depending on the spouse’s age.
Key Considerations for Spouse Beneficiaries
- Income Needs: If the surviving spouse relies on the IRA for immediate income, the inherited IRA may be the best choice.
- Tax Strategy: Delaying Required Minimum Distributions (RMDs) or managing taxable income through strategic withdrawals is essential for minimizing tax burdens.
- Section 327 Rules: Spouses can use the deceased spouse’s age to calculate RMDs, which can delay distributions and provide tax advantages in certain situations.
Real-Life Examples
Consider Mary, 56, who inherits her late husband Joe’s IRA. Leaving the account as an inherited IRA allows her to make penalty-free withdrawals to meet her income needs before age 59½. In another case, Hillary, 72, inherits her younger husband Thomas’s IRA. By keeping it as an inherited IRA and using his age for RMDs, Hillary delays mandatory withdrawals, optimizing her tax situation.
Navigating the Process
Inherited IRA rules are complex, and every situation is unique. Whether you need guidance on the Secure Act, RMD rules, or strategies tailored to your financial goals, we’re here to help.
If you’re navigating the challenges of an inherited IRA, contact us to discuss your options and make the best decision for your future.
