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Q. I understand surviving spouses have options that no one else does when they inherit their deceased spouse’s IRA. What are those options?
-Sherry in Taos
A.: Sherry, you are correct that surviving spouses have options no one else has. The most common option is to rollover the deceased’s IRA into the IRA of the surviving spouse. Only surviving spouses can do this. When this is done the funds are treated as though the surviving spouse had always owned them.
This option is available regardless of the ages of the deceased or the surviving spouse but the surviving spouse should be the sole beneficiary of the account. If the spouse is not the sole beneficiary, they can take a lump sum distribution and roll the funds into their own IRA. If this rollover is not properly executed the entire amount becomes taxable.
As an alternative, before Sept. 30 of the year after the year of death, the IRA can be separated into individual inherited IRAs for each beneficiary thus making the surviving spouse the sole beneficiary of that share. From there, the surviving spouse can transfer the inherited IRA into their own IRA.
The surviving spouse may also leave the inherited IRA as a spousal inherited IRA. Options for a spousal inherited IRA differ depending upon whether the deceased died before or after their Required Beginning Date (RBD). The RBD is the deadline for one’s first Required Minimum Distribution (RMD). That date is April 1 of the year after the year in which the deceased turned 72.
If the IRA owner died on or after the RBD, the first step is for the surviving spouse to take the deceased’s RMD if that RMD had not already been taken for the year of death. From there, the surviving spouse may opt to take RMD annually from the inherited IRA over their single life expectancy determined by the survivor’s age in the year after death and recalculated each year or the survivor may use the deceased’s remaining life expectancy, whichever is longer. Whichever method is chosen, the RMD from the inherited IRA must start by Dec. 31 of the year after the year of death.
If the IRA owner died before the RBD, the surviving spouse may opt to take RMD annually from the inherited IRA over their lifetime. However, RMD from the inherited IRA may be postponed until the year the deceased would have turned 72.
If the IRA owner died before the RBD and in 2020 or later, the surviving spouse may also opt to subject the inherited IRA to the new 10-year rule. This option does not require periodic distributions. It requires only that the inherited IRA be completely distributed by the end of the 10th tax year after the year of death. This option is so new, I have not yet seen it employed.
In my next column, I will go into more detail about when these spousal inherited IRA options work best and a few other quirks that may be relevant.
If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line.
Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide but with offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.
