What happens to an IRA when a spouse dies?

One of the difficulties that arise when a spouse passes on is how to handle the deceased’s IRA and other retirement accounts. Generally, retirement accounts are treated differently than other assets left by the deceased, and you must observe IRS rules for inherited IRAs.

A surviving spouse who is the primary beneficiary of an IRA has more options than other beneficiaries. The surviving spouse can decide to put the money in an inherited IRA, rollover the IRA into their own IRA, or withdraw all the money within five years. The spouse can also disclaim part of or all of the deceased spouse's IRA assets so that they are passed on to a contingent beneficiary.

Inherited IRA Rules

When the IRA owner dies, the retirement assets held in the account are bequeathed to a beneficiary. Usually, the beneficiary can be any person such as a spouse, child, parent, grandchild, or friend, who has been designated as a beneficiary in the beneficiary designation form. If there is no designated beneficiary, the IRA will be passed on to the estate of the deceased.

The options that a beneficiary has with the inherited IRA depends on several factors. Some of these factors include the type of IRA (traditional or Roth IRA), whether there were designated beneficiaries, and whether the beneficiary is a surviving spouse, child, or other beneficiaries. Also, different rules apply depending on whether the IRA owner died before or after the starting date for required minimum distributions.

Options for a Surviving Spouse

Surviving spouses have more options with an inherited IRA than other beneficiaries. If you are a named beneficiary in your deceased spouse’s IRA, you have the following options with the money:

Open an inherited IRA

If you are not yet 59 ½ and you want to access the funds without an early withdrawal penalty, you can convert the IRA into an inherited IRA. You will be required to change the title of the IRA to reflect that it is an inherited IRA held for the benefit of a surviving spouse.

If the deceased spouse had reached age 72 at death, the surviving spouse must start taking the required minimum distributions (RMDs) by the end of the calendar year after the spouse’s death. However, if the spouse was younger than 72 at death, the surviving spouse can delay taking RMDs until when the spouse would have turned 72. Once you start taking RMDs, you can take distributions based on your life expectancy or the age of the deceased spouse.

If the spouse died before January 1, 2020, the RMD age is 70 ½ rather than 72.

Rollover IRA

The surviving spouse can also transfer the inherited IRA assets into their own IRA. Rolling over to an IRA or other retirement account helps avoid an immediate tax obligation since the transfer is not considered a withdrawal.

If you inherited a Roth IRA, you can roll it over to your Roth IRA. You can continue making contributions to the Roth IRA if your income is below the income limits for Roth IRA. This rollover option is only available to surviving spouses, and it restricts transfers to the same type of account i.e. Roth IRA to Roth IRA or traditional IRA to traditional IRA.

Once you rollover the inherited IRA into your IRA, you will need to name beneficiaries who will inherit your IRA. Also, unlike a traditional IRA, you won’t need to take RMDs from your Roth IRA account even if you have reached age 70 ½. 

Disclaim the IRA assets

If you don’t need the deceased spouse’s IRA assets, you can give up any claim to the assets. This is known as disclaiming the assets. Once you give up your rights to the assets, the assets will be passed on to the contingent beneficiaries.

Usually, a surviving spouse can disclaim the IRA assets within nine months after the spouse’s death, and before taking ownership of the assets. Once you disclaim the money, you are essentially giving up any rights to the assets, and you cannot rescind that decision if situations change.

Withdraw the money

If you need money immediately, you can decide to cashout the deceased spouse’s IRA. If you are younger than 59 ½, you can be allowed to take a distribution from the IRA without owing an early withdrawal penalty. However, you will have to pay ordinary taxes on the distribution you take, which can push you to a higher tax bracket.  

If the IRA owner had not turned 72, you can postpone taking the distributions as long as you empty the IRA by the end of the 5^th year after account owner’s death.

What happens to an IRA if there are no designated beneficiaries?

If the deceased spouse did not designate a beneficiary for his/her IRA, the IRA assets will become part of the deceased estate, and they will be subject to a probate process. If the deceased account owner was younger than 70 ½, the IRA assets paid to the estate of the account owner must be distributed to the resulting beneficiaries within five years of the account owner’s death.

If the deceased IRA owner died after RMDs had started, the resulting beneficiaries will not be restricted to the 5-year rule. Instead, the beneficiary may spread distributions over the deceased owner’s remaining life expectancy had they lived. There is a minimum distribution that must be taken out each year, but beneficiaries are allowed to take out more than the RMD amount.