Inherited IRA rules for spouses
Spouses have greater flexibility than non-spousal beneficiaries when it comes to inherited IRAs. They can choose to treat the money as their own retirement savings or keep it in an inherited IRA. This gives them greater control over what they pay in taxes on their inheritance and how much money they ultimately receive.
Rolling the inherited funds into their own retirement account enables spouses to avoid required minimum distributions (RMDs) until they turn 73. If the funds originally came from a Roth account, inheriting spouses may be able to leave the money in their own Roth retirement account indefinitely. However, once the money is in the spouse's account, traditional withdrawal rules apply. Taking money out while you're under 59 1/2 usually results in a 10% early withdrawal penalty.
Leaving the money in an inherited IRA is a better option for younger spouses who want to access some of their inheritance before 59 1/2. They'll have the option to take a lump-sum distribution, withdraw all the money by the end of the 10th year after the year of the deceased's death (the end of the fifth year if the deceased died in 2019 or earlier), or take RMDs based on their own life expectancy.
Inherited IRA rules for non-spouses
Non-spouses don't have the option to roll their inherited IRA funds into their own retirement account. Most non-spousal beneficiaries inheriting retirement account funds after 2019 are also unable to take RMDs based on their own life expectancy (discussed below).
The only non-spousal beneficiaries who can use the life expectancy method for inherited IRAs in 2020 and later are:
- Minor children (only until they reach 18)
- Disabled or chronically ill individuals
- A person not more than 10 years younger than the deceased
Those who don't meet one of these criteria will have to use the 10-year method. There's no rule about how much you must take out each year with this option. You just need to make sure everything is out by the end of the 10th year after the year the original account owner died, or you could face a 25% penalty on the amount you failed to withdraw.
Your options for receiving benefits
Here's a breakdown of inherited IRA withdrawal options for spousal and non-spousal beneficiaries.
Spousal beneficiary
