Inheriting an IRA, what are your options as a spouse?

Inheriting an IRA – What are your options?

If you inherit an IRA (or 401(k) or other tax-deferred account) you’ll have to make a decision on how you want to receive it and understand what the required minimum distribution rules are. The rules around inherited retirement accounts have become even more complex since the SECURE Act passed in 2019. The regulations differ depending if you are a spouse or a non-spouse beneficiary.

If you are spouse beneficiary, there are several choices you can choose from on how to receive the IRA:

1.     Roll the inherited account into an account registered to your name by what’s called a “Spousal Rollover”- Only spouses have this option for IRAs. By doing this rollover, a surviving spouse will be able to stretch distributions over their lifetime. The longer the investor can stretch the IRA, the more time the account has to grow tax deferred. Distributions are allowed to be taken out penalty free at age 59 ½ and required minimum distributions will start at age 72.

2.    Inherit the account as a beneficiary account - If you are a spouse and you need money from the account before you turn age 59 ½ you may want to remain a beneficiary of the inherited account. The account would have to be properly registered as an Inherited IRA. By remaining as a beneficiary, you avoid the 10% penalty for early withdrawals. 

3.    Take a lump-sum distribution - You may take all the money in the account as a withdrawal and avoid the 10% early withdrawal penalty. If it is a small balance on the IRA account, this may make some sense. However, you’ll owe income taxes on the withdrawal, and taking out the entire balance may move you into a higher tax bracket.

Note: What are required minimum distributions? Minimum amounts that a retirement plan account owner must withdraw annually based on age, enforced by the IRS. The required minimum distribution age is 72. Penalty of 50% of amount not withdrawn applies if not taken.

None of the information in this document should be considered tax advice. You should consult with your tax professional for information concerning your individual situation. Tax services are not offered through, or supervised by, the Lincoln Investment Companies