For many, the most special person in their lives is their spouse. The tax code treats spouses in unique ways by granting them abilities unavailable to others. Inheriting an IRA is one of those times.
Q.: In your Q&A about what kids can do with their parents IRAs, you mentioned that spouses have other options. What are those? Sandy in Milwaukee
A.: Sandy, spouses indeed have special powers when inheriting an IRA. The most often used spouses-only option is the ability to roll the IRA into their own name. This makes things very simple for the surviving spouse. By rolling into their own name, they call all the shots and the funds are treated as if they had always been in the spouses name. Most surviving spouses do this reflexively as the default. It feels like a no-brainer.
However, there are circumstances in which other options should be considered. Three that we see a lot are a surviving spouse who is older than the deceased spouse, a surviving spouse who is under 59 陆 years old and a surviving spouse in a high marginal income tax bracket.
When the survivor is older than the deceased and rolls the IRA into their own name, the IRA is treated as if it were always the survivors so Required Minimum Distributions are based on the survivors higher age. RMDs will be larger if they had already begun or will start sooner if they had not already begun.
This can be addressed by taking the deceaseds IRA as an inherited IRA. The IRA stays in the deceaseds name and the surviving spouse is referred to in the title with wording like spousal beneficiary. RMDs will then be based upon the deceaseds birthdate and the Single Life table unless and until the funds are rolled into an IRA just in the surviving spouses name.
When the survivor is under 59 陆 and rolls the IRA into their own name, the IRA is treated as if it were always the survivors so distributions could be subject to the 10% early distribution penalty. This too can be addressed by taking the deceaseds IRA as an inherited IRA. The survivor will be able to take distributions at will, pay the applicable taxes but avoid the 10% penalty. Once the survivor reaches 59 陆, they can roll the deceaseds IRA into their own IRA if they wish.
A surviving spouse in a high-income tax bracket with no need for the taxable income that comes from the IRA may prefer that lower income family members inherit the IRA money instead. The surviving spouse can disclaim their interest. The disclaiming spouse does not get to decide how the funds are distributed. The funds flow to the contingent beneficiaries as though the disclaiming spouse pre-deceased the original IRA owner. Anyone interested in disclaiming should consult a qualified attorney.
If you have a question for Dan, please email him with MarketWatch Q&A on the subject line.
Dan Moisands comments are for informational purposes only and are not a substitute for personalized advice. Consult your advisor about what is best for you. Some questions are edited for brevity.