Spousal Beneficiary Options for IRAs

Why is it important to distinguish between a spouse beneficiary and a non-spouse beneficiary of an IRA? It’s important because non-spouse beneficiaries do not have the same distribution options as spousal beneficiaries. A few key differences are discussed below.

Take RMDs as a Beneficiary

Spousal IRA beneficiaries are not required to treat IRAs they inherit from a deceased spouse as their own. They may be significantly younger and need to withdraw IRA assets to live on but they also want to avoid an IRS early distribution penalty. Assume Mary passes away at age 58 and her husband Ben is the beneficiary of her IRA. The IRA contains significant assets but Ben is only 35 years old and he needs the IRA money to live on. If he elects to treat the inherited IRA as his own, he will not only owe income taxes on any distributions, he will also owe a 10% early distribution penalty because he is under 59½ and no other exception applies. In this case, Ben is likely better off taking required minimum distributions (RMDs) as a regular beneficiary. Should his situation improve a few years down the road, Ben can later elect to treat the IRA as his own and roll it into his own IRA, basically “turning off” the RMD requirement until he reaches age 70½. However, a spousal rollover is a one-time irreversible election so Ben needs to consult with his distribution expert and make an informed decision.

Retitling – Treat As Your Own

A spouse beneficiary may elect to treat the deceased spouse’s IRA as his or her own by simply having the IRA retitled with the surviving spouse’s name. Only spousal beneficiaries have this option available to them.

Rollovers

A spousal rollover permits the surviving spouse to rollover the inherited IRA into his or her own existing IRA. To illustrate, assume Mary is the beneficiary of her husband Ben’s IRA. Ben passes away and Mary elects to rollover Ben’s IRA into her own because she is only 62 years old and she wants to delay her required minimum distributions from Ben’s IRA until she reaches age70½. Mary may now name her young grandchildren as the beneficiaries, creating the opportunity for a multi-generational IRA strategy that allows them to enjoy tax-deferred distributions over their individual life expectancies. No other type of IRA beneficiary has this option. *IMPORTANT: a spousal rollover is a one-time, irreversible election.

60-Day Rule

A spousal IRA beneficiary has the advantage of the 60-day rollover rule. Using Ben and Mary as an example, assume Mary passed away and Ben withdrew the IRA assets. Ben has 60-days to complete a rollover and deposit the funds into his own IRA. In this case, to avoid rollover errors, Ben may simply choose to retitle Mary’s IRA as his own rather than engage in a rollover transaction.

A 60-day rollover option is never available to non-spouse IRA beneficiaries. Once a distribution is made to the non-spouse, it is irrevocable and fully taxable.