Warning! The options described here are for spouse beneficiaries named on the beneficiary forms of IRA accounts. Non-spouse beneficiaries and spouses who inherit through an estate have a different sets of rules.

Your spouse has died and you are named the beneficiary of their IRA. What do you do now? The IRA custodian has automatically retitled the account as an inherited IRA and after all, wouldn’t they only do what is best for you? Should you leave it that way or should you move the assets to your own IRA?

A surviving spouse can move inherited IRA funds from a deceased spouse to an account in their own name at any time – even if they took distributions from the inherited account. This is a question that very often is answered incorrectly by advisors and IRA custodians. Once a spouse beneficiary does move the funds into their own IRA, there is no going back to an inherited IRA. Spouse beneficiaries should be sure that this is the right move for them before taking this step.

As with many retirement savings decisions, the decision of an inherited vs. an owned IRA will depend a great deal on age; what is the surviving spouse’s age and how old was the deceased spouse at death?

Surviving Spouse is Under Age 59 ½

Generally, a surviving spouse under age 59 ½ should keep the IRA as an inherited IRA – at least for a while. Distributions to a beneficiary are never subject to the 10% early distribution penalty regardless of the beneficiary’s age. The surviving spouse can take distributions from an inherited IRA, at any time, in any amount, as they need funds. Income tax will be owed on any pre-tax amounts they withdraw from the IRA.

There will be no required minimum distributions (RMDs) from the inherited IRA until the year the deceased spouse would have reached age 70 ½. At that time, the RMDs from the inherited IRA will be calculated using the Single Life Expectancy Table and the age of the surviving spouse each year. A spouse beneficiary should consider moving the inherited IRA to their own IRA after reaching age 59 ½ when the 10% penalty is no longer a concern.

The spouse beneficiary should be sure to name their own beneficiary on the inherited account.

Surviving Spouse is Over 59 ½

Generally a surviving spouse over age 59 ½ should move the inherited IRA funds to an IRA in their own name. They do not have to start RMDs until they reach the year they turn age 70 ½. In the meantime, they can take distributions from their own IRAs at any time, in any amount, whenever they want to. Income tax will be due on any pre-tax amounts withdrawn from the IRA but they are no longer subject to the 10% early distribution penalty.

The surviving spouse should be sure to name their own beneficiary on any new IRA accounts they establish. If the inherited funds are moved to an existing IRA in their own name, they should be sure to update the beneficiary form on that account, if necessary.

Surviving Spouse is Over 70 ½

The determining factor in this scenario is the age of the deceased spouse.

When the deceased spouse is older than the surviving spouse, the inherited funds should generally be moved into the surviving spouse’s IRA account. This allows for consolidation of accounts and the RMDs will be lower when using the age of the younger spouse.

When the deceased spouse is younger than age 70 ½, the surviving spouse might want to keep the IRA as an inherited IRA – at least for a while. There will be no RMDs from the inherited IRA account until the deceased spouse would have reached the year they turn 70 ½. This will reduce the RMDs to the surviving spouse in the short term.

In the year before the deceased spouse would have had an RMD the inherited IRA should be transferred to the surviving spouse’s own IRA. Then, in the year the deceased spouse would have been 70 ½, the surviving spouse will have an RMD on the combined balances of the IRAs using their age and the Uniform Lifetime Table. This table produces a lower RMD than the Single Life Expectancy Table that would have to be used if the IRA remained as an inherited IRA.

Beneficiary forms should be reviewed and updated at the time of the death of the first spouse and anytime the IRA funds are subsequently moved from an inherited IRA to the surviving spouse’s own IRA.