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.
IRA Inherited from Someone Other than Your Spouse
If you inherit an IRA from someone other than your spouse, you cannot treat the IRA as your own. You cannot make contributions to the IRA, or make any rollovers into or out of it. But, you may be able to transfer the balance in the IRA, as a trustee-to-trustee transfer, to another IRA. You can do this provided the IRA to which you are transferring the balance was set up and maintained in the name of the deceased IRA owner for your benefit as the beneficiary of the IRA. You cannot transfer the balance to an IRA set up in your own name.
As the beneficiary of the IRA in this case, you will not owe any taxes on the assets in the IRA account or on the accumulated earnings until you take a distribution from the IRA. You must start to receive distributions from the IRA according to the distribution rules that apply to beneficiaries, as indicated below under “Required Distributions”.
Basis in an Inherited IRA
If the owner had a cost basis in the IRA as a result of non-deductible contributions made to the account, this basis will remain with the IRA. If you are the decedent’s surviving spouse and you choose to treat the inherited IRA as your own, you can combine this basis with any basis you may have in your own IRA. But if you are not the surviving spouse, you cannot combine the basis of the inherited IRA with the basis in your own IRA or any other IRA you inherit. If you are a beneficiary and you take distributions from both an inherited IRA and from your own IRA(s), you must calculate the taxable and non-taxable portions of the distributions separately, using a separate Form 8606, Nondeductible IRAs, for each.
Required Distributions
The required distributions you must receive when you inherit an IRA as a beneficiary depend on various factors, including whether you are a surviving spouse or other beneficiary, how old you are, and whether the deceased owner was taking distributions.
Surviving Spouse
If you are the surviving spouse and you choose to treat the IRA you inherit as your own, you will need to determine if you are required to take a minimum required distribution. You would make this determination the year in which you elect to be treated as the owner of the IRA you inherit.
If you become the owner the year your spouse died, you do not have to determine the minimum required distribution for that year based on your life (your age) as indicated below. Instead, you can take your deceased spouse’s required minimum distribution, if applicable, for the year, to the extent it was not already taken. This will generally depend on whether the owner had reached age 70 ½. The required beginning date is April 1 of the year after the owner of the IRA reaches age 70 ½. If the owner dies after reaching age 70 ½ but before April 1st of the next year, there is no required minimum distribution because the required beginning date has not yet been reached.
Required Distributions Based on When the Owner Died
If the owner died on or after his or her required beginning date to start receiving distributions, and you are the beneficiary, your minimum distributions for years following the IRA owner’s death are determined based on the longer of:
Your single life expectancy based on your age, according to Table I, Single Life Expectancy For Use By Beneficiaries, which is included in Appendix C of IRS Publication 590 Individual Retirement Arrangements (IRAs), or
The owner’s life expectancy.
If the owner died before his or her required beginning date to start receiving distributions, generally you would use your single life expectancy (Table I) as the basis for determining your minimum required distributions.
Your required minimum distribution for the year is calculated by taking the IRA account balance at the end of the previous year and dividing it by your life expectancy based on your age according to Table I as mentioned above.
But if you are a surviving spouse and are the sole beneficiary, you do not have to take a minimum required distribution until the year in which your deceased spouse would have reached age 70 ½, if he or she died before reaching that age. If you choose to treat the IRA as your own, you would not have to take a minimum required distribution until you reach age 70 ½.
Distribution by the End of the Fifth Year
If you are a beneficiary of the IRA, you may be required to receive the entire balance in the account by the end of the fifth year after the year of the owner’s death. In this case, you may not have to take a distribution until the fifth year.