Inherited IRA Rules for Spouses: Should You Roll It Over or Keep It?
Losing a spouse is an emotionally challenging experience. On top of grief, you have financial decisions to make. If you have inherited an IRA from your spouse, you have options to consider that can impact your financial future. Understanding when to opt for an inherited IRA versus rolling it into your own IRA can help you make the best decision for your circumstances while maximizing tax efficiency.
The Two Main Choices: Inherited IRA vs. Your Own IRA
When you inherit a traditional or Roth IRA from your spouse, you generally have two main options:
Transfer the funds into an Inherited IRA. This is its own distinct type of account, separate from a Traditional IRA or Roth IRA, with its own rules. Or,
Roll the funds into your own IRA (or Roth IRA.)
Each option has distinct IRS rules, tax implications, and potential penalties, so choosing the right one depends on your age, income needs, and retirement strategy.
When to Opt for an Inherited IRA
An inherited IRA allows you to withdraw funds without facing early withdrawal penalties, even if you are under age 59½. This can be a key advantage if you need access to the funds for funeral costs, debts, or living expenses, but aren’t yet at retirement age.
You might consider this option if:
You are under 59½ and need access to the funds. Unlike rolling into your own IRA, an inherited IRA lets you take penalty-free distributions at any time. Keep in mind distributions must be made annually, and the account must be fully liquidated within 10 years.
Your spouse was older than you. If you are younger than 73 (the age at which Required Minimum Distributions (RMDs) generally begin in 2024), keeping the IRA as inherited can allow you to delay taking distributions until your late spouse would have turned 73.
You don’t want RMDs immediately. If your spouse was already taking RMDs but you are younger, an inherited IRA could allow you to delay RMDs based on your own life expectancy.
However, one downside is that if you leave the funds in an inherited IRA, you must take RMDs based on IRS life expectancy tables, even if you don’t need the income.
When to Roll It into Your Own IRA
Rolling your spouse’s IRA into your own IRA allows you to treat the funds as if they were always yours. This means:
If you are under 59½, you won’t be able to take penalty-free withdrawals. However, if you don’t need immediate access to the funds, this won’t be a concern.
If you are over 59½, rolling it into your own IRA can provide more flexibility. You can take distributions as needed, without mandatory withdrawals until age 73.
If you don’t need the money right away and want to continue tax-deferred growth, rolling it into your own IRA may be the best long-term option.
If you inherit a Roth IRA, rolling it into your own Roth IRA can preserve the tax-free growth for longer, without RMDs.
Other Considerations
If you are significantly younger than your spouse, an inherited IRA might allow you to stretch distributions over your lifetime, keeping your taxable income lower.
Was your spouse already at RMD age? If your spouse was already taking RMDs, you’ll need to continue them, regardless of which option you choose.
If estate planning is a concern, understanding how your own beneficiaries will inherit the account is important, as the rules differ between inherited IRAs and personal IRAs.
Frequently Asked Questions
1. What is the best option for an inherited IRA from a spouse? It depends on your age and financial needs. If you need penalty-free withdrawals, an inherited IRA may be best. If you prefer to delay RMDs and continue tax-deferred growth, rolling it into your own IRA could be more beneficial.
2. Can I roll my spouse’s IRA into my own IRA tax-free? Yes, if you are the spouse of the deceased, you can roll it into your own IRA without tax consequences. RMD rules will then apply based on your date of birth as opposed to your spouse’s date of birth.
3. What are the IRS rules for inheriting a spouse’s IRAs? Spousal beneficiaries can either transfer the account into an inherited IRA and follow RMD rules or roll it into their own IRA and follow standard retirement account regulations.
The Bottom Line
Choosing between an inherited IRA and rolling it into your own IRA is not a one-size-fits-all decision. It depends on your age, financial situation, and whether you need access to the funds. If you are unsure which route is best, consulting a financial advisor can help you weigh the IRS rules, tax implications, and long-term benefits.
If you’ve recently inherited an IRA from a spouse and need expert guidance on tax-efficient withdrawal strategies, required minimum distributions, or rolling it into your own IRA, schedule a free consultation for assistance today! You don’t need to navigate this process alone. Our experienced team of advisors is here to lend a hand.
The information provided in this article is for educational purposes only and should not be considered financial, tax, or legal advice. Every individual’s financial situation is unique, and it is recommended to consult with a qualified financial advisor or tax professional before making any decisions regarding an inherited IRA. Tax laws and IRS regulations are subject to change. For the most current rules and guidance, please refer to the official IRS website.
