What To Do With Your Deceased Spouse’s IRA
In this blog I’m focusing on your options with your spouse’s IRA if he or she predeceases you. (For simplicity I will use the pronoun “they” to avoid having to use the more wordy “he or she”).
After your spouse passes away the IRS will require you to start filing as single rather than as married filing jointly which will significantly bump up your marginal tax rate. So any inherited IRA decision you make that reduces your taxes could be valuable. To further complicate matters, your spouse may also have a Roth IRA, which additionally impacts the decision. Whether or not your spouse had reached their required beginning date (RBD) for starting required minimum distributions (RMDs) before passing away is another factor. And you may not need to take out money from your IRAs at all in order to fund your retirement costs. As with all financial decisions, the best choice for you will depend on your particular situation. Let’s look at a couple of scenarios, all assuming that you don’t need the money and your goal is to reduce taxes.
Case 1: Your spouse has a tax-deferred traditional IRA and dies before their RBD (April 1 of the year after they turn age 72). In this situation you have three choices: (1) keep your spouse’s IRA separate and wait until their RBD to begin withdrawing RMDs, (2) roll over your spouse’s IRA into your own and start taking RMDs based on your life expectancy rather than on theirs, or (3) withdraw all the money within 10 years (which can be done as a lump sum in year ten). One choice is pretty obvious. If you are older than your spouse, choice 1 is better than choice 2, and vice-versa. But what about choice 3? If your deceased spouse was older than 62 when they died (i.e. their RBD is less than ten years away) and you are likely to pass away within the next ten years, then choice 3 may be better for your heirs since it would allow you to keep building up the IRA until you pass on.
Case 2: Same as case 1 except your spouse has a tax-free Roth IRA. Since RMDs are not required for Roth accounts, whatever age your spouse dies will be considered as prior to their RBD. So in this situation choice 2 is almost always best since no RMDs will be required for your own Roth. The money in the account will continue to grow tax-free until you pass away. It also adds flexibility. If you want to reduce the tax cost of some retirement expense you can always use some of the Roth money to avoid having to withdraw from an IRA or having to sell taxable assets.
Case 3: Your spouse has a traditional IRA but passes away on or after their RBD. Guess what? You don’t have a choice! The IRS will continue to require RMDs, but will base the life expectancy on the longer of yours or your spouse’s. In other words if your spouse is older than you when they die, the IRS will reduce their RMD amounts based on your life expectancy, or vice-versa.
With the federal government currently in the middle of a political battle involving potential changes not only to income taxes and RMDs but also to estate taxes, any of this could change in the future. Ben Franklin famously said, “In this world, nothing is certain except death & taxes.” He was wrong about the latter!
Here’s a link to the IRS publication containing the details: https://www.irs.gov/pub/irs-pdf/p590b.pdf.