A surviving spouse who inherits an IRA may be able to treat the IRA as his or her own by changing the name on the account or by rolling over the IRA assets, or may choose to be treated as a beneficiary. Special rules on required distributions may apply for beneficiaries of inherited IRAs.
If you inherit a traditional IRA you are considered to be a beneficiary, and as a beneficiary you must include any taxable distributions you receive in your gross income. But special rules apply if you inherit the IRA from your deceased spouse. You do not have to withdraw the balance from the IRA and pay tax at the time you receive it. You have other options available to you.
IRA Inherited From Your Spouse
If you inherit an IRA from your deceased spouse, you may be able to avoid paying tax at the time you receive the IRA. You generally have three choices of what you can do with an inherited IRA:
You can treat the IRA as your own by naming yourself as the new owner of the same IRA,
You can treat the IRA as your own by rolling over all the IRA assets into another IRA or retirement plan that you already own, or
You can treat yourself as a beneficiary.
Naming Yourself as the New Owner
When you treat the IRA as your own by designating yourself as the account owner, the name on the account will change, and there would generally be no tax consequences. You can only treat the IRA as your own if you are the sole beneficiary and you have an unlimited right to make withdrawals from the IRA. And, even if you do not make the choice yourself, you will be considered to have chosen to treat the IRA as your own if you make any contributions (including rollovers) to it, or you do not take the required minimum distribution that a beneficiary of the IRA must take.
Rolling the IRA Over
If you receive a distribution from your deceased spouse’s IRA, you can avoid tax by rolling it over into your own IRA or other retirement plan within 60 days, as long as it is not a required distribution. These retirement plans include a qualified employer plan, a qualified employee annuity plan (section 403(a) plan), a tax-sheltered annuity plan (section 403(b) plan), and a state or local government deferred compensation plan (section 457 plan).
A rollover is a tax-free distribution you receive from an IRA or other retirement plan that you contribute to another retirement plan. Your contribution of the money or other assets (such as securities) to the second IRA or retirement plan is called the rollover contribution. Normally you would not be subject to tax until you receive a distribution from the second retirement plan.
Treating Yourself as a Beneficiary
You can treat yourself as a beneficiary, instead of the new owner of the IRA. As a beneficiary, if you receive distributions from the IRA, you may have to include them in your taxable gross income. You may have to treat yourself as a beneficiary if you are not the sole beneficiary, in which case you could not treat the inherited IRA as your own.