Spouses who inherit IRAs have more options for taking money from the accounts than non-spouses. Deciding the appropriate path depends largely upon the personal circumstances of spouses. These IRA beneficiaries need advice about the consequences of the available choices. Most significant is the tax impact, which ultimately affects the account value over time. The depth of Enrolled Agent education about tax on IRA withdrawals allows EAs to deliver substantial guidance for spouses in deciding how to administer an inherited account.
The beneficiary of an IRA from a deceased spouse has three options. Taking no action results in the default position described in an Enrolled Agent course. This requires annual distributions from the inherited IRA based upon the spouse beneficiary’s life expectancy. Secondly, the situation can be treated like that of a non-spouse beneficiary. That results in the choice of taking distributions based upon life expectancy or liquidating the entire account within five years. A third possibility, which is only allowed for spouse beneficiaries, is rollover of the IRA and treating the account as if it had always belonged to the spouse.
Whether the rollover of an inherited IRA into the name of the beneficiary spouse is an advantage or not depends upon the spouse’s preferences and age. Knowledge of IRA rules from studying for the Enrolled Agent examination is helpful in understanding the effects of a rollover. Since the rollover IRA belongs to the spouse, distributions are taxed just like any IRA. For example, a spouse under age 59½ who doesn’t require any money in an inherited IRA should rollover the account so that its value continues to grow tax-deferred until the mandatory distribution age of 70½.
Alternatively, if the spouse is less than age 59½, a penalty is assessed on early distributions from her own IRA in addition to regular income tax. Therefore, any spouse under this age limit who needs funds from the inherited IRA should not rollover the account into her name. The downside of leaving the account in the name of the deceased spouse is that it limits distribution options upon death of the inheriting spouse. A rollover gives the spouse an ability to assign beneficiaries after her death. An Enrolled Agent tax expert can aid in rectifying the twin objectives of immediate withdrawal needs and control of future beneficiary designations.
No deadline is imposed on the rollover option for spouses who are the sole beneficiaries of an IRA. Hence, a spouse may take financially necessary distributions from an inherited IRA without penalty and subsequently rollover any remaining balance into her own IRA. In these instances, the jobs for Enrolled Agents merely assure that distributions are taken on time each year and amounts are at least equal to the minimum based upon life expectancy.
This technique is often utilized until a beneficiary spouse reaches age 59½. At that point, she has penalty-free access to funds in other retirement accounts she owns. That permits stopping distributions from the inherited IRA and rolling over the balance. The rollover account then no longer contributes to annual withdrawals until its value influences mandatory minimum distributions at age 70½.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.