If you inherit your spouse’s IRA you have a few very important decisions to make. And depending on your circumstances, the conclusions you come too and the decisions you make, it could impact you and your children for decades to come. Fortunately, with a little understanding, it will be very easy for you to make the right choices and avoid the most common inherited IRA mistakes. Let’s take a look at a few situations:
1. You are under 59 ½ and need at least some or all of this IRA money now.
If you are the beneficiary of your spouse’s IRA, you can set things up to take as much money as you like out of the account without paying an IRA withdrawal penalty. You can do this if you set up a spousal beneficiary IRA rather than roll the account to your own IRA. . Of course you’ll pay income tax on any amount you withdraw but no penalty. The only downside to this approach is that no matter how old you are, you will be forced to take out a required minimum distribution and pay regular income tax on that amount.
The problem with this decision of course is that you miss out on the opportunity to grow your account tax deferred. That’s why I normally suggest that you take money out of an IRA as a last resort.
2. You are over 59 ½ and you don’t need all the money now.
If you don’t need all the money now you can take advantage of continued tax deferral if you roll your spouse’s IRA into your own IRA. This means that the retirement account will be treated as if it’s your own. If you are over 59 ½ you can take distributions only on the money you want. You won’t pay any tax penalty and you will only pay income tax on that money that you actually withdraw. You won’t be forced to take any money out of the account until you reach 70 ½. Even then, you only have to withdraw your required minimum distributions and that’s just a fraction of the account. So this alternative allows you to grow most of the money tax deferred. Sweet.
3. You probably won’t need the money until you reach 59 1/2
If that describes you just roll the money over to your own IRA. This allows you to grow the money on a tax deferred basis. You won’t be forced to take any distributions until you reach age 70 ½ and you won’t incur any pesky tax penalties.
You can see that the best thing to do if you are about to inherit your spouse’s IRA depends on your unique situation.
Have you ever inherited a spouse’s IRA? How did you treat it? Why? Would you do it differently today?