The Tax Consequences for a Surviving Spouse Who Inherits an IRA
Original post by Leslie McClintock of Demand Media
Individual Retirement Arrangements -- both the traditional and Roth -- can ensure the financial security of you and your spouse in retirement and possibly after your death. To preserve the surviving spouse's options, you must take care to actually name her as the sole beneficiary on the account. When the account owner dies, the surviving spouse has some important decisions to make.
Required Minimum Distributions
Traditional IRAs are tax deferred at the contribution and growth stages, but fully taxable when you take the income. The Internal Revenue Service doesn't want to wait forever to receive its money. Traditional IRA owners must therefore begin taking distributions beginning by April 1 of the year after the year in which they turn age 70 1/2. These mandatory distributions are called "required minimum distributions," or RMDs. Generally, you calculate the RMD by dividing your account balance at the end of the previous year by your remaining life expectancy, according to tables the IRS publishes each year in Publication 590. Special rules apply if the spouse is the sole beneficiary and is ten or more years younger than the IRA owner.
General Rule for Inherited IRAs
Generally, the rule for inherited traditional IRAs is that the heir who receives the IRA must take out the required minimum distributions each year following the year the original owner died. This is also true for a surviving spouse who chooses to receive the IRA as an inherited IRA.
Unlike other heirs, surviving spouses who have been named as the sole beneficiary on an IRA have the option to treat the IRA as their own, as if the decedent never owned it. Alternatively, the surviving spouse can roll her deceased spouse's IRA into her own existing IRA. This allows the surviving spouse to use her own age and actuarial table to determine RMDs, rather than those of the original owner. If she is substantially younger, this may give her additional flexibility in controlling her retirement income by lowering her RMDs and delaying the date at which she must begin taking RMDs.
If the original IRA owner doesn't name a beneficiary, or names his estate as the beneficiary, the spouse does not have the election option. If the original owner dies prior to April 1 of the year after the year in which he turned 70 1/2, the estate must liquidate the IRA within five years, which means the surviving spouse who inherits the estate must bunch more income into fewer years, exposing more money to higher marginal income brackets. If the original owner died after that point, the estate and its heirs must observe the RMDs that would have been in effect had the orginal owner not died.
If a spouse is the sole beneficiary of a Roth IRA, there are no RMDs due, provided the surviving spouse treats the Roth IRA as her own. The original Roth IRA owner already paid taxes on the contributions, so no more taxes are due. Other beneficiaries don't pay income tax on Roths unless the account has not met the five-year rule -- meaning the assets have not been in the Roth IRA for at least five years prior to the withdrawal.
- Internal Revenue Service: Publication 590 - Individual Retirement Arrangements
- North Carolina Estate Planning Blog: Inheriting an IRA From a Spouse? Make Sure You Know the Rules?
- J.K. Lasser Institute: Your Income Tax Guide - 2011
About the Author
Leslie McClintock has been writing professionally since 2001. She has been published in "Wealth and Retirement Planner," "Senior Market Advisor," "The Annuity Selling Guide," and many other outlets. A licensed life and health insurance agent, McClintock holds a B.A. from the University of Southern California.