Surviving Spouses as Sole Designated Beneficiaries of IRAs

Surviving spouses who are sole designated beneficiaries of a decedent's IRAs have two favorable options with respect to those IRAs that other beneficiaries do not.

Special options available to surviving spouses. Like any other beneficiary of a decedent's IRA, a surviving spouse can receive a distribution as a beneficiary from the decedent's IRAs. But, a surviving spouse who is the sole designated beneficiary of the decedent's IRA has two special options that are not available to other beneficiaries: Such a spouse may: (1) elect to treat the decedent's IRA as the surviving spouse's own IRA; or (2) roll over the decedent's IRA into an IRA established in the spouse's own name (“spousal rollover”). With either of these special options, the surviving spouse is treated as if he/she had funded the IRA.

Advantages of these special options. There are three major advantages to making the spousal rollover or election:

(1) Required beginning date (RBD) may be deferred. With the rollover or election, the RBD for distributions is April 1 of the year following the year in which the surviving spouse attains age 70 1/2. Thus, a surviving spouse who is younger than the decedent can defer the start of the payout period by making the rollover or electing to treat the decedent's IRA as his/her own.

(2) More favorable RMD rules during the life of the surviving spouse. If, after the death of an IRA owner, the IRA beneficiary either doesn't qualify for the special options or doesn't use either of the special options, his/her required minimum distributions (RMDs) are based on his/her single life expectancy.

If there is a spousal rollover or an election, the receiving IRA is treated as if the surviving spouse had funded it. In that case, the spouse can take RMDs using the favorable “Uniform Lifetime Table”, which is based on the joint life expectancy of the spouse and a hypothetical 10-years-younger beneficiary.

(3) Surviving spouse's ability to name his/her own beneficiaries and thus keep IRA going longer after his/her death. By making the rollover or election, the surviving spouse can name his/her own beneficiaries for the IRA and give the IRA a longer lifespan if the spouse names children, grandchildren or other younger family members or friends as beneficiaries. Thus, if a rollover or election is made and: ... the surviving spouse dies on or after his/her RBD (usually April 1 of the calendar year following the calendar year in which he/she reaches age 70 1/2) and designated a non-spouse beneficiary for the account, the IRA balance is paid out over the longer of: (1) the remaining life expectancy of the designated beneficiary, using the beneficiary's attained age in the year immediately following the year of the IRA owner's death; or (2) the remaining life expectancy of the surviving spouse, using his/her attained age in the year of his death.

Potential problem for certain young surviving spouses. If the surviving spouse is younger than age 59 1/2, the rollover or election could have a significant disadvantage: pre-age-59 1/2 withdrawals from that IRA generally will be subject to the 10% penalty tax on top of regular income taxes unless in the form of substantially equal periodic payments.

By contrast, if the rollover or election is not made, pre-age-59 1/2 withdrawals from the decedent's IRA will not be subject to the penalty tax. When the spouse attains age 59 1/2, he/she can roll over the IRA into an IRA in his/her own name or make the election.

As you can see, this can be a complicated decision by a surviving spouse requiring consultation with a Tax Advisor having experience in this area. Contact us at 1-866-287-9604 for more information.

Posted by John D. Winslow, CPA