Probably the biggest advantage that a spouse beneficiary of an IRA has over other beneficiaries is the ability to do a spousal rollover. Only a spouse beneficiary can do a spousal rollover. Non spouse beneficiaries do not have this option. With a spousal rollover, inherited retirement account funds become the spouse beneficiary’s own.
How a Spousal Rollover Is Done
A spousal rollover can be done by rollover, direct transfer or by the spouse beneficiary treating the inherited IRA account as her own. All three of these methods will achieve the same end result of a spousal rollover.
A direct transfer of the inherited assets is the safest way to get a spousal rollover done. It avoids the rules and potential pitfalls that come with a 60-day rollover. If the deceased spouse died on or after his required beginning date (RBD), the year-of-death RMD must be taken before a 60-day (spousal) rollover is permitted. But, an RMD can be directly transferred to another inherited IRA and taken later in the year.
Example: Jake, age 75, dies in 2023 without taking his RMD. His spouse, Gwen, age 68, is his beneficiary. Gwen decides to do a spousal rollover and she transfers the inherited IRA to a new IRA in her own name. She can transfer Jake’s entire IRA, including the year-of-death RMD, to the new IRA and take the year-of-death RMD later in the year. In 2024, Gwen will not need to take an RMD from the new IRA because it is considered her own IRA and she is not yet 73.
When a spouse beneficiary treats an inherited account as her own, the surviving spouse essentially pretends as if she owned the deceased spouse’s IRA account all along. This method of doing a spousal rollover is relatively uncommon as many custodians do not allow this option.
Consider a Spousal Rollover Carefully
While a spousal rollover is a powerful strategy, it should be considered carefully. This election is irrevocable. Once the funds are in spouse’s own IRA, a 10% early distribution penalty will apply if the spouse is under age 59 ½ when distributions are taken. There is no going back to an inherited IRA.
A young spouse beneficiary should consider whether he will need the funds in the inherited IRA. If so, leaving the account as an inherited IRA may be the better choice. There is no deadline for a spousal rollover, so there is nothing that prevents it from being done later on when the spouse beneficiary reaches age 59 ½.
These rules can be confusing, and mistakes can be expensive. Spouse beneficiaries with questions about the right move should speak with a tax advisor who is knowledgeable about these rules.
By Sarah Brenner, JD
Director of Retirement Education
Ed Slott and Company, LLC
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Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.