Inherited IRAs: 3 RMD Options for Surviving Spouses

What You Need to Know

Under the Secure Act, surviving spouses are still allowed to take distributions over their own lifetime. But that’s not the only option.
The choice the surviving spouse makes will affect the rate of distributions that must be taken from the inherited IRA.
Because surviving spouses have limited time to choose, it’s important to ensure that clients understand their choices and the consequences.

The original Setting Every Community Up for Retirement Enhancement (Secure) Act sharply limited the distribution options for most individual retirement account beneficiaries who inherited accounts in 2020 or later. Surviving spouses are one of the few enumerated groups of individuals who continue to be eligible for taking inherited IRA distributions over their life expectancy post-Secure Act.

However, as before the Secure Act, surviving spouse beneficiaries have multiple options when it comes to determining how to treat an IRA that was inherited from a spouse. The choice the surviving spouse makes will affect the rate of distributions that must be taken from the inherited IRA — which, of course, can have a substantial effect on the survivor’s tax liability over the years.

Because surviving spouses have limited time to choose, it’s important to ensure that clients understand their choices — and the consequences of those choices.

Secure Act Inherited IRA Changes: Background

Post-Secure Act, surviving spouses are one of the only classes of beneficiaries who can continue to use the life expectancy rule for account distributions (based on their own life expectancy). However, they continue to have options for how the IRA is treated going forward.

Surviving spouses can, of course, continue to treat the IRA as a beneficiary (inherited) IRA like any other designated beneficiary. They also have the option of rolling the inherited account balance into their own IRA or an employer-sponsored retirement account. As a third option, surviving spouses can elect to treat the inherited IRA as their own.

Under proposed regulations related to the Secure Act, however, the IRS has clarified that the surviving spouse has only a limited amount of time to elect to treat the IRA as their own. Under those proposed regulations, the surviving spouse must make the election before the later of (1) the end of the year in which the surviving spouse reaches their required beginning date or (2) the end of the year following the year of the original account owner’s death.

RMD Rules for Inherited IRAs

The spouse beneficiary’s RMD obligations will depend on how they elect to treat the account.

RMD Option 1: Treat the IRA as an inherited IRA.

If the spouse treats the IRA as an inherited IRA, the account will be registered in both the name of the deceased spouse and the surviving spouse (surviving spouse as beneficiary of deceased spouse). As an “eligible designated beneficiary,” the spouse beneficiary can take RMDs using their own life expectancy or the 10-year rule. The 10-year rule may be required under the terms of the IRA agreement or whether the spouse beneficiary makes the election.

Under the beneficiary IRA option, RMDs must begin by the later of (1) Dec. 31 of the year after the year the original owner died or (2) the year in which the original owner would have been required to start taking RMDs.