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Dear Dan,
You wrote a while back that rolling a deceased spouse’s IRA into one’s own IRA was the most common choice surviving spouses make but it wasn’t always the best choice. My father is ill so my mom will be dealing with this soon. Rolling it into her IRA seems super simple but if there is a better option, she should know about it.
— Terry in Oviedo, Fla.
Dear Terry,
I am so sorry to hear of your dad’s illness.
Spouses are the only beneficiaries that can roll an IRA into their own account. Everyone else can either take the money and pay the resulting taxes or if they wish to spread the taxable income out some, they can take the account as an inherited IRA.
Rolling your dad’s IRA into your mom’s IRA after he passes could be the best choice. It is for a lot of people. If she rolls his IRA into her IRA, it is treated as though she always owned it. That is often simple, easy, and perfectly sensible.
So, why would a surviving spouse not roll it into their own IRA? I will give you two examples, both driven by the survivor’s age.
If she is younger than 59 ½, and she takes his IRA as a spousal inherited IRA, she could withdraw funds without paying a 10% penalty even while under 59 ½. In contrast, if she rolls it into her own IRA, because the IRA is treated as if it were always hers, the exception for distributions due to death does not apply and any withdrawals would be subject to the 10% penalty in addition to the normal taxes.
Once an IRA is rolled into the surviving spouse’s IRA, it cannot go back into an inherited IRA. Consequently, many young survivors will keep the IRA as a spousal inherited IRA until they are certain they will not need to make withdrawals prior to 59 ½. At that point, hey typically roll the inherited IRA into their own IRA.
If she is older than her deceased husband, rolling the IRA into her own means those funds would be subject to Required Minimum Distributions (RMD) sooner. The older the beneficiary and the greater the age difference, the more dramatic the impact on RMD. If he was not yet subject to RMD and she takes the IRA as an inherited IRA, she can even wait until he would have been subject to RMD before taking any withdrawals.
Terry, if neither of the above examples apply or your mom is younger than your dad but over 59 ½, it is probably fine for your mom to keep it simple and roll your dad’s IRA into her IRA upon his passing. My best to your mom, dad, and your entire family.
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 from 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 reader questions are edited to aid the presentation of the subject matter.
