Watch Out for Spousal Inherited IRAs

Published on: 08:18AM Jul 10, 2014

Spouses who inherited IRAs have a couple of elections available to them that non-spouses do not have. However, care must be taken to make sure that the 10% early withdrawal penalty does not apply when distributions are finally taken.

When a spouse passes away owning an IRA whose beneficiary is the surviving spouse, that spouse has an election that can be made. This election allows the surviving spouse to rollover the IRA into their own IRA which would allow them to stretch-out distributions over a possibly longer span than would be normally allowed to other non-spouse beneficiaries. However, if the surviving spouse is younger than age 59 1/2, these distributions would then be subject to an early distribution 10% penalty (unless the distributions are exempt under any of the other exemptions).

Therefore, the surviving spouse may want to consider leaving the IRA in the name of her/his deceased spouse. This allows the spouse to take a distribution without incurring the penalty and it also allows a rollover into her/his IRA after age 59 1/2 to take advantage of the longer lives available to them.

This whole area can be very complicated and if this situation applies to you, I would strongly suggest getting guidance before any rollover occurs.