Inheritance Guidelines: When a Younger Spouse Inherits an IRA

Hook Law Center (formerly Oast & Hook)

Virginia Beach, VA (Law Firm Newswire) November 6, 2015 – When a younger spouse inherits an IRA, it may be in the best interest of the spouse to continue being a beneficiary of the IRA.

A beneficiary is not required to pay the 10 percent early distribution penalty on funds taken out of the IRA. The spouse would only have to pay income taxes on the amounts withdrawn from the account. But if the spouse were to move the inherited account into his or her own name, then the spouse would have to pay the penalty, unless an exception applied.

In addition, there are no required minimum distributions (RMDs) for a spouse beneficiary until such time as when the deceased spouse would have turned 70 ½. If the spouse beneficiary does not need to withdraw any funds from the IRA, they can remain in the tax-deferred account. Upon reaching age 59 ½, the spouse beneficiary will not be required to pay the 10 percent early distribution penalty on amounts in his or her own IRA, and thus, the spouse could then transfer the inherited IRA into one in his or her name.

“It is important to be aware of one’s options concerning an inherited IRA in the event of a spouse’s death,” said Andrew H. Hook, a Virginia estate planning attorney with Hook Law Center, with offices in Virginia Beach and northern Suffolk. “With proper planning and sound advice, a spouse beneficiary of an IRA can make informed decisions.”

It is important to note that the spouse beneficiary must transfer the funds into his or her own account prior to the year in which the deceased spouse would have turned 70 ½. As a beneficiary, one is required to use the Single Life Table for making calculations of the RMDs from the IRA. If the spouse beneficiary owned the IRA, the RMDs would be calculated using the Uniform Lifetime Table, and would be less than the RMDs as a beneficiary. Therefore, as a beneficiary, the spouse would be paying higher amounts of income tax every year, and exhausting the account far more rapidly than if the spouse owned the account.

Furthermore, the beneficiaries of the spouse beneficiary would be unable to use their life expectancies at the time of the spouse’s death. They would be required to use the spouse’s life expectancy, and they would be considered successor beneficiaries. Thus, the yearly distribution would be larger, the beneficiaries would have to pay higher amounts of income tax every year, and the account would be diminished more quickly.

Another option is to roll over the assets into a new IRA, and convert the assets into a Roth IRA. In a Roth IRA, one cannot deduct taxes from the contributions, but withdrawals of funds are not subject to tax, as long as certain criteria are met. However, one will be required to pay taxes on the amount of funds converted from a traditional IRA into a Roth IRA.

One may instead wish to disclaim the IRA assets, which would then go to the contingent beneficiaries of the deceased spouse. This could be a wise decision if inclusion of the IRA assets would cause one’s entire estate to be greater than the estate tax exemption limit for married individuals.