How Rules Differ On Inherited IRAs For Spouse And Non-Spouse

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So what happens when you inherit retirement plans? It all depends on the type of account. It also depends on whether the beneficiary is a spouse. Those variables will determine the rules that govern how the inheritance is taxed and what options are available. These rules can be confusing and it’s highly recommended that you seek out professional advice to make sure that your understanding is valid before making any decisions that would have significant financial impact.

The following summary, as structured by Schwab, highlights some of the significant differences in the rules between Spouse/Non-Spouse Traditional IRAs/Roth IRAs:

Traditional IRA / Spouse Inherits

If you inherit a Traditional, Rollover, SEP, or SIMPLE IRA from a spouse, you have several options, depending on whether your spouse was under or over age 70½. Most commonly, those who inherit an IRA from a spouse transfer the funds to their own IRA.

  1. If your spouse was under 70½, your choices are:
    1. You transfer the assets into your own existing or new IRA.
    2. You transfer the assets into an Inherited IRA held in your name.
      1. Life Expectancy Method
      2. 5 Year Method
    3. All assets in the IRA are distributed to you.
  2. If your spouse was over 70½, your choices are:
    1. You transfer the assets into your own existing or new IRA.
    2. You transfer the assets into an Inherited IRA held in your name.
      1. Life Expectancy Method – Only
    3. All assets in the IRA are distributed to you.

Traditional IRA / Non-Spouse Inherits

If you inherit a Traditional, Rollover, SEP, or SIMPLE IRA from a friend or family member, you have several options, depending on whether the account holder was under or over age 70½.

  1. If your spouse was under 70½, your choices are:
    1. You transfer the assets into an Inherited IRA held in your name.
      1. Life Expectancy Method
      2. 5 Year Method
    2. All assets in the IRA are distributed to you.
  2. If your spouse was over 70½, your choices are:
    1. You transfer the assets into an Inherited IRA held in your name.
      1. Life Expectancy Method – Only
    2. All assets in the IRA are distributed to you.

Roth IRA / Spouse Inherits

If you are inheriting a Roth IRA as a spouse.

  1. You transfer the assets into your own existing or new Roth IRA.
  2. You transfer the assets into an Inherited IRA held in your name.
    1. Life Expectancy Method
    2. 5 Year Method
  3. All assets in the Roth IRA are distributed to you.

Roth IRA / Non-Spouse Inherits

If you are inheriting a Roth IRA from a friend or family member

  1. You transfer the assets into an Inherited IRA held in your name.
    1. Life Expectancy Method
    2. 5 Year Method
  2. All assets in the Roth IRA are distributed to you.

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