The Weekly Scenario: IRA Special Rules for Spouses

Question: What options will my spouse, who is named as beneficiary on my IRA, have once she receives the account after my death?

Answer: All the IRA special rules for spouses, including spousal rollovers, are only available when the spouse is named (as beneficiary) on the beneficiary designation form.  A spouse who inherits through an estate or trust is not automatically entitled to these benefits. With a spousal rollover, the funds in the surviving spouse’s IRA are treated as if they were always in the surviving spouse’s IRA.  Accordingly, the spouse is no longer treated as a beneficiary and for many spouse beneficiaries, the spousal rollover will be an appropriate strategy as it allows the spouse to combine accounts and receive smaller required minimum distributions (“RMDs”).

When a surviving spouse chooses to keep an inherited IRA (not opt for the rollover), she is not subject to RMDs until the later of December 31 of the year following the year of the original account owner’s death or December 31 of the year her deceased spouse would have been 70½. This allows the spouse beneficiary of an IRA owner who died young to delay RMDs potentially for many years.

Moreover, distributions from inherited IRAs are never subject to the 10% early distribution penalty. So in the circumstance in which the spouse beneficiary is under age 59½ and wants to access her IRA funds (without penalty), choosing an inherited IRA makes that possible.

If, on the other hand, a younger spouse beneficiary elects to do a spousal rollover, the account is no longer an inherited IRA.  Distributions taken before age 59½ will now be subject to the 10% early distribution penalty.

Comment: One other interesting point to note.  Once a spousal rollover is elected, there is no going back (so to speak). However, the decision to go with an inherited IRA is reversible! Therefore, a spouse may want to keep the funds in an inherited IRA when she is under age 59½ and then do a spousal rollover later when the early distribution penalty is no longer an issue.

Example: After Husband’s death in 2002, Wife elected to do an inherited IRA.  Wife will not be required to take RMDs until the year Husband would have been 70½ (2012).  In 2007, Wife is over age 59½ and decides it is time to do a spousal rollover. By doing so, she can delay future RMDs until she reaches the year she turns age 70½ (2017).