Special Rules for Spouse Beneficiaries of Inherited Retirement Accounts
Generally, the longest period over which non-spouse beneficiaries can stretch distributions from inherited retirement accounts is their single life-expectancies. In some cases, the distribution period may be limited to five-years, or the remaining life-expectancy of the decedent. However, if you are the surviving spouse of the retirement account owner, you have more flexible options for any retirement accounts that you inherit. The following is a high level explanation of these options.
Treat as Your Own
A non-spouse beneficiary must keep inherited retirement account amounts in an ‘Inherited’ or ‘Beneficiary’ account. This limits the periods over which the beneficiary can take distributions, and consequently the period over which the amount can continue to benefit from tax-deferred treatment. On the other hand, if you are the surviving spouse of the decedent, you can treat the inherited amount as your ‘own’ which provides for more flexible distribution options. If you choose to treat the amount as your ‘own’, it must be transferred or rolled over to your own retirement account instead of being maintained in an inherited account.
Longer Distribution Periods
If the retirement account owner dies before the required beginning date (RBD), the longest periods over which a non-spouse beneficiary can take distributions is over his or her life-expectancy, or distribute the entire balance by the end of the 5th year that follows the year in which the account owner dies. The governing plan agreement usually determines the option available. Under the life-expectancy method, distributions to the non-spouse beneficiary must begin by December 31 of the year that follows the year in which the retirement account owner dies. If a spouse beneficiary chooses to keep the amount in an Inherited account and use the life-expectancy method for distributions, distributions need not begin until the year the decedent would have reached age 70½, or December 31 of the year that follows the year in which the owner dies, whichever is later.
If a spouse beneficiary treats the retirement account as his or her own, distributions are not required to begin until the year he or she reaches age 70 ½ , and in this case, distributions would be calculated using the uniform life table which produces a lower RMD amounts than that which is produced using the beneficiary’s single life-expectancy table. Distributing lower RMD amounts means that a larger balance is available to continue benefiting from tax-deferred growth.
You Can Change Your Mind
If you are a spouse beneficiary and elect to keep the amount in an inherited IRA, you can change your mind at any time and rollover or transfer the amount to your own IRA. Keeping the amount in an inherited retirement account is usually recommended if you are under age 59 ½ and will need to take distributions from the amount, as doing so would exempt the amount from the 10-percent distribution penalty that applies to pre-59½ distributions.
No RMD for Roth IRAs
A non-spouse beneficiary of a Roth IRA must distribute the amount over his or her life-expectancy or distribute the entire balance by December 31 of the 5th year that follows the year in which the account owner dies. Spouse beneficiaries can treat the Roth IRA as their own, in which case, taking distributions would be optional, thereby allowing for continued tax-deferred growth of earnings which would be tax-free for qualified distributions.
The options available to spouse beneficiaries allow for more flexible distribution planning and less restrictive distribution options. However, the proper steps must be taken in order for the spouse beneficiary to receive these benefits.
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