IRAs can be a substantial asset when someone dies. Inheriting an IRA from a spouse can be a great opportunity to continue tax-deferred investing. Surviving spouses have a unique opportunity that that don’t apply if you inherit an IRA from someone else. A surviving spouse has the ability to roll over an IRA inherited from a spouse into their own new or existing IRA and treat the assets as if they were theirs. The 4 basic options for a surviving spouse are:
1. Roll the inherited IRA over into your own IRA. Rolling the inherited IRA into your own IRA gives you the benefit of having the amount and timing of the required distributions based on your age as the surviving spouse. If for example, your spouse was over the age of 70 ½ but you are not, this option allows you to stretch out the tax deferred benefits until you reach 70 ½. Beneficiaries who are not spouses cannot roll over an inherited IRA or contribute to it.
2. Remain a beneficiary. As a spouse you can choose to keep your name on the IRA. If you transfer the inherited IRA into your own name, the amount of the required distributions will be based on your age as the surviving spouse. This can be a good option if the surviving spouse is younger than 59 ½ but wants to take out funds from the IRA without incurring early withdrawal penalties.
3. Disclaim the IRA assets. Another option is to disclaim the assets. If you do not need the inherited assets, you can refuse to accept them i.e. disclaim them, in which case the IRA would go to the next named beneficiary. If this beneficiary is younger than you, such as a child, the required distributions will be based on his or her life expectancy. If you want to take advantage of this option, the disclaimer must be made within 9 months of the IRA owner’s death.
4. Cash out the IRA. It may be tempting to cash out the IRA but don’t do this without first checking with your financial advisor or tax accountant.
It is important that you handle the inheritance of an IRA correctly to avoid paying subsequent penalties and taxes. As part of trust administration after the death of the first spouse, the estate planning lawyers at Law Office of Scott C. Soady, A Professional Corporation can work with CPAs and financial consultants to assist you not only with the distribution of trust assets but also with how to handle inherited IRAs.