Suppose you’ve just inherited a traditional IRA from your spouse. Before you take any action, make sure you fully understand all the options available to you. Otherwise, you may regret your initial impulses, especially if you haven’t benefited from professional guidance.
The tax law provides more flexibility for a spousal beneficiary than a non-spouse beneficiary. Essentially, you have four main choices.
- Assume the IRA as your own. This means that you transfer the IRA assets into an existing IRA of your own and treat it like it’s always been yours. You’ll continue to realize the benefits of IRA ownership while meeting the obligations. This option isn’t available to non-spouse beneficiaries.
- Inherit the IRA as a beneficiary. In this case, you’re still subject to the usual rules, but you can postpone distributions if you were older than your deceased spouse. Normally, the IRA owner must begin taking required minimum distributions (RMDs) after age 70½, but you can wait until your spouse would have reached age 70½ or December 31 of the year after your spouse’s death, whichever is later.
- Take a lump-sum distribution. Once the assets are legally yours, you can arrange a lump-sum distribution (which may also serve as an RMD). Of course, the distribution is taxable at ordinary income rates under the usual rules for IRAs.
- Disclaim the IRA assets. This least-known option may be preferred if you want the IRA assets to pass through directly to the secondary beneficiaries (e.g., your children). It is a way for a wealthy individual to avoid other estate tax complications. But be aware that the election to disclaim IRA assets is irrevocable.
Be mindful that this is only a brief summary of some general rules. To obtain guidance on this issue in your situation, contact our office.