What happens to an IRA when you die?

Find out what happens to an IRA when you die, and the options that the spouse and non-spouse beneficiaries have with the inherited IRA.

3 min read

When you open an IRA, you are required to fill a beneficiary designation form, naming the persons who will inherit your IRA retirement assets and the specific proportions. The spouse is often the primary beneficiary, but there may be other named beneficiaries like relatives and friends.  

Once you die, the IRA will be bequeathed to a named beneficiary. The beneficiary can be a person or entity that you named in the designated beneficiary form. The beneficiary can be the spouse or non-spouse beneficiaries like a child, grandchild, other blood relatives, friends, trusts, or charitable organization.

Options for the surviving spouse

If the spouse is the sole beneficiary of the inherited IRA, he/she has several choices with the retirement assets.

Treat IRA as his/her own

The spousal beneficiary can treat the inherited IRA as his or her own by becoming a designated account owner. When this happens, the standard rules of the account will apply to the new owner, and the spouse can name new beneficiaries, make contributions, and even withdraw money from the account.

If the spouse is below age 59 ½, any withdrawals from the account are subject to a 10% penalty and ordinary income tax if the account is pretax. Once the spouse reaches 70 ½, they must start taking the required minimum distributions (RMDs) from the account.  Any RMDs not taken from the account are subject to a 50% penalty.  

Rollover IRA into their retirement account

A spouse can avoid an immediate tax obligation by rolling over the inherited IRA into their traditional IRA or 401(k). Once the account owner dies, the spouse has 60 days after their spouse’s death to initiate the rollover. If the inherited IRA is a traditional IRA, the deferred taxes associated with the IRA will continue to be deferred in your IRA until when you withdraw funds from the account.

The spouse is not required to take RMDs until they are 70 ½. However, if he/she is 70 ½ or older, they can use the life expectancy method to know how much RMDs they will take. The spouse can also name new beneficiaries in the account.

Keep the inherited IRA

The spouse can continue treating the inherited IRA as the deceased spouse’s account. This option works well if the original account holder dies before age 70 1/2, and the spouse is below 59 ½. In this case, RMDs would be delayed until when the original account holder would have taken these distributions. The spouse can then make withdrawals from the account without paying the 10% early withdrawal penalty. Once the spouse turns 59 ½, he/she can rollover the inherited assets into their retirement account. 

Disclaim part of or all the inherited retirement assets

If the spouse does not need the inherited assets or prefers the IRA to be passed on to other named beneficiaries, he/she can disclaim all or part of the assets. This means the spouse gives up their right to claim part or all the funds in the inherited IRA. The disclaimed assets will then go to other beneficiaries named in the designated beneficiaries form.

Options for Non-Spouse Beneficiaries

Non-spousal beneficiaries have fewer options than spousal beneficiaries, and they cannot treat the IRA as their own or rollover the inherited IRA into their retirement account.

Some of the options that spousal beneficiaries have may  include:

Transfer inherited assets into an inherited IRA

The non-spouse beneficiary can make a trustee-to-trustee transfer of eligible distributions to an inherited IRA. The rollover must be made to a new IRA and not an IRA owned by the beneficiary, and it must be in the name of the deceased account holder. The transfer should be completed by December 31 of the year after the account owner’s death. The beneficiary will not owe any income taxes until when they start taking distributions from the account.

Cash out

You can also decide to take a lump sum distribution from the account once you inherit the retirement assets. The distribution will push you to a higher tax bracket, and you will owe taxes on the distribution.

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

If the IRA account holder died without a designated beneficiary, the IRA assets will be paid to the deceased’s estate. The IRS requires the named heirs to take the full distribution from the account within five years. The estate of the deceased is required to pay tax obligations that arise when the estate is distributed among beneficiaries.