When a spouse passes and you are named the beneficiary of an IRA, you have a number of options. However there are some specifics to consider related to choosing a spousal rollover.
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If the deceased was 70 years & 6 months or older, they were required to take a Required Minimum Distribution (RMD). Assuming you are younger, selecting the spousal rollover option could delay or stop RMDs on the account. What this does for you is allow your account to continue to grow tax deferred until you reach the target age. Increasing its worth.
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If you are younger than 59 years & 6 months, taking distributions from a spousal rollover would subject you to taxes and a 10% early distribution penalty. Needless to say, if you are young and need the money, establishing an inherited IRA payable to you rather than your spouse is likely a better option.
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When you inherit a Roth IRA, choosing a spousal rollover will not trigger RMDs. However, an inherited Roth IRA that is already payable to the spouse will require RMDs.
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If you were to determine you don’t need some or all of the money in the first to die spouse’s IRA, you could disclaim a portion or all of it. When a spouse disclaims the IRA, the funds are directed to the deceased spouse’s contingent beneficiaries (usually children or grandchildren). What this decision does is it stretches the IRA by resetting the distributions based on the beneficiaries’ life expectancy which should be much longer than yours. More tax-deferred growth means larger IRA balances. This can be an especially wise decision if there are concerns your estate will be subject to estate taxes. This decision requires thought because once done it cannot be undone. The decision must be made within 9 months of your spouse’s death and before you take possession of the assets.
These are just three general rules to consider related to inherited IRAs. The issues surrounding inherited IRAs are complex and should be made after careful deliberation and ideally with the help of your tax or financial advisor.
