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How to navigate the rules of a spouse inherited IRA

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Losing a spouse is one of the most difficult experiences that no one wants to go through. You've shared your life with this person, and when they die, you have to figure out how to move forward. One challenge many surviving spouses face is navigating their new financial situation, especially when the deceased spouse's accounts pass on to them. One of those accounts could be a spouse inherited individual retirement account (IRA).

If you are the beneficiary of your spouse's IRA, there are special rules regarding distributions and penalties you need to understand. It might seem overwhelming to learn all of these rules, especially during such an emotional time. But this breakdown of the options available to a spouse who inherits an IRA can help you understand what you need to know.

Choices for a sole beneficiary of a spouse inherited IRA

If you are a spouse who is the sole beneficiary of a traditional, rollover or simplified employee pension (SEP) IRA, you have several options. You may take a lump-sum distribution, establish an inherited IRA or transfer the account into your own IRA.

Establish an inherited IRA

You can transfer your deceased spouse's IRA into an inherited IRA. An inherited IRA is still in your spouse's name, and you cannot make any contributions to it. But it potentially can provide tax-deferred growth. It is important to know that if you choose this option, then you are subject to specific required minimum distribution (RMD) rules unique to spouse inherited IRAs.

RMD rules stipulate minimum amounts you must withdraw from an account each year. Failure to withdraw at least the required amount triggers penalties.

Transfer into your own IRA

This option is perhaps the simplest and can provide you with the most flexibility. As the spouse of the original account owner, you have the option of simply transferring the IRA into your own account. In this case, there are no additional rules or restrictions. It's as if the money had been yours, and the normal IRA rules apply.

To do this, you first need to open an IRA if you don't already have one. Next, initiate the transfer by requesting the appropriate transfer forms from the brokerage firm that holds your spouse's IRA. Note that this option only is available to spouses and only if there are no other beneficiaries.

Take a lump-sum distribution

A spousal beneficiary may withdraw the entire account balance as a single lump-sum distribution. While this grants you access to the money to use for whatever reason you choose—which can be extremely helpful to cover expenses after the death of a spouse—there are some significant drawbacks, including:

  • The entire distribution is subject to income tax at your marginal tax rate. If the distribution is large enough, it may push you into a higher tax bracket.
  • If you distribute the account, then you lose any remaining ability to benefit from the tax deferral the IRA provides.

If you take a lump sum, you can request the custodian of your IRA to transfer the money into your bank account, or you can transfer it into an investment account.

Spouse inherited IRA RMD rules

The date you must begin taking distributions from the account depends on two factors: when your spouse passed away and how old they were at the time.

If your spouse died on or after January 1, 2020, then the new rules enacted with the passing of the SECURE Act apply. RMDs must start by December 31 of the year they would have turned 72 or the year following their death, whichever is later. The RMD is based on your life expectancy.

Deaths prior to 2020, are based on rules before the SECURE Act went into place. Consult your tax professional for additional information.

Choices for a spouse inheriting a Roth IRA

If you inherit a Roth IRA from your spouse, then you have the same basic options available to you as outlined above for tax-deferred accounts. You can either:

  • Transfer the money to your own Roth IRA. The original owner of a Roth IRA is not required to take minimum distributions. Since an inherited IRA transferred into your own account is treated as though the money was yours from the start, then you aren't subject to RMDs for dollars in this account.
  • Transfer it to an inherited Roth IRA. It's generally better to transfer an inherited IRA into your own account when the option is available because it is for spouses who are sole beneficiaries. However, if that option isn't available—perhaps because there are multiple beneficiaries—then you can open an inherited Roth IRA. You'll still need to start RMDs as described previously, but the distribution is not subject to income tax since it's a Roth account.

What happens if there are multiple beneficiaries?

Some options outlined here are only available to spousal beneficiaries and only if they are the sole beneficiary. But if there are multiple beneficiaries—such as a child—on the original IRA account, then it needs to be split into separate inherited IRAs for each beneficiary; otherwise, you may lose the ability to use your own life expectancy to determine RMDs.

If you are the second-generation beneficiary, meaning you are inheriting an IRA that your spouse had already inherited from someone else, then things get even more complex:

  • If the original account owner died prior to January 1, 2020, then you must withdraw the entire account balance within 10 years.
  • If the original account owner died on or after January 1, 2020, then your options depend on whether your spouse was an eligible designated beneficiary of the original IRA.
    • If your spouse was an eligible designated beneficiary, then you have 10 years to withdraw the entire balance.
    • If your spouse was not an eligible designated beneficiary, then you must continue with the same 10-year schedule as your spouse. You do not get your own 10-year period.

Under the 10-year rule, there is no minimum amount you have to take out each year. You can spread out your withdrawals however you wish, or you can make a single withdrawal at any point.

Connect with a financial advisor for support

On top of the difficulty of losing a spouse, deciding on the best action to take with an inherited IRA can be stressful. The rules are sometimes confusing and are potentially changing as Congress is currently debating the SECURE Act 2.0, which could alter RMD rules.

Connecting with a financial advisor can help you better understand the rules and options for inheriting an IRA from your spouse. An advisor can work with you as you embark on this next phase of life without your spouse and help you make the right decisions for your situation that set you up for a sound financial future.

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Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

Distributions of earnings are tax-free as long as your Roth IRA is at least five years old and one of the following requirements is met: (1) you are at least age 59½; (2) you are disabled; (3) you are purchasing your first home ($10,000 lifetime maximum); or (4) the money is being paid to a beneficiary.


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