If you have been named the beneficiary of your spouse’s IRA, it is important that you understand the rules regarding IRA inheritance and the potential opportunities to defer taxes.
The rules relating to inherited IRA’s are complex and it is important to consult with your tax advisor to make sure that you understand how the rules affect your specific situation. It is possible to incur higher taxes or even penalties if you make a misstep in applying the rules.
As the surviving spouse who is named a beneficiary you have several options, some more tax effective than others. Following are some of the options:
1.) Roll the IRA assets into an IRA in your name and treat them as if they were your own IRA funds. This is a particularly good option if your spouse had already reached 70 ½ but you have not. You can defer taking required minimum distributions (RMD’s) until you reach 70 ½ rather than continuing to use your spouse’s RMD. This can be an effective way to defer taxes.
2.) Transfer the IRA assets to an inherited IRA and either begin RMD’s or if your spouse had not yet started RMD’s you can delay RMD’s until your spouse would have turned 70 ½.
3.) You can transfer the IRA assets to an inherited IRA and invoke the 5-year rule. This is available only if your spouse had not yet reached 70 ½. Under this option, you have a 5-year period to withdraw all the IRA assets. The assets can be withdrawn as you desire over the 5-year period as long as they are all withdrawn within the noted time period.
4.) You can disclaim the IRA assets and allow them to pass to your spouse’s contingent beneficiaries. This option is great if you don’t need the assets. If children or grandchildren inherit the assets as contingent beneficiaries, the potential tax deferral options could be significant. In most cases the beneficiary can take the RMD’s over their longer life expectancy, allowing the funds to grow tax deferred.
With many options, it is important to consult with your tax and financial advisors to determine what is the best option for you. If you have questions about your specific situation, please contact us.