Making the Most of Spousal Inherited IRAs Under the SECURE Act
Inheriting an IRA from a spouse is a unique situation in estate planning. Unlike other beneficiaries, spouses have specific options that can provide tax advantages and greater flexibility in how they manage and distribute the funds. However, the SECURE Act has introduced some changes to inherited IRAs, making it more important than ever for spouses to understand their options and plan carefully.
Let’s dive into the key choices available to spouses, the tax implications of each, and why partnering with a financial team is essential to developing a strategy that fits your financial goals.
The Unique Options for Spousal Inherited IRAs
When a spouse inherits an IRA, they have three primary choices for handling the account:
- Roll the IRA into Their Own Account
Rolling the inherited IRA into your own IRA allows you to treat the funds as if they were always yours. This means you’ll follow the required minimum distribution (RMD) schedule based on your own age, potentially deferring distributions longer and allowing the account to grow tax-deferred. This option can be particularly beneficial if you’re younger than the deceased spouse, as it allows you to delay RMDs until age 73, maximizing the time for tax-deferred growth. - Keep the IRA as an Inherited Account
Alternatively, you can choose to maintain the IRA as an inherited account. This option can be advantageous if you’re younger than 59½ and want to take distributions without facing the early withdrawal penalty. By treating the account as inherited, you can access funds without penalties, offering more flexibility if you need additional income before reaching retirement age. - Treat the IRA as Your Own and Defer RMDs
If you’re not yet at the age where RMDs apply, you may opt to take advantage of treating the IRA as your own, delaying distributions until you reach the required age. This allows you to keep the account growing without having to make withdrawals immediately, which can be an excellent way to maximize tax-deferred growth for as long as possible.
Each of these choices offers its own benefits, and the right one will depend on your financial needs, age, and long-term goals.
Tax Implications of Each Option
Understanding the tax implications of each option is crucial to making the best decision. When rolling an inherited IRA into your own, you’ll follow the typical IRA tax rules, which allows for continued tax-deferred growth. However, if you need access to funds sooner, keeping it as an inherited IRA can help you avoid the 10% early withdrawal penalty if you’re under 59½.
It’s also important to note that if a spouse rolls an IRA into their own account and later passes it to another beneficiary, like a child, the 10-Year Rule established by the SECURE Act applies. This means that non-spouse beneficiaries must fully withdraw the account within 10 years of inheriting it, potentially impacting their tax burden.
Collaborating with Your Financial Team for Inherited IRAs
In estate planning, having a well-rounded financial team is invaluable. Working alongside your financial advisor and accountant ensures that all aspects of your inherited IRA are considered, from the tax impact to income needs and future legacy planning. Here’s why a collaborative approach is so effective:
- Tax Efficiency: Your accountant can help you understand the tax impact of each option and suggest strategies to minimize your tax burden, whether that’s through timing distributions or rolling over the account.
- Income Planning: A financial advisor can assess your current and future income needs to help decide whether an immediate income stream or long-term growth is the best strategy.
- Future Beneficiaries: If you plan to pass on the IRA to a non-spouse beneficiary, your financial team can help structure the account in a way that maximizes their inheritance while minimizing potential tax consequences under the 10-Year Rule.
This team-based approach ensures that no angle is overlooked, providing a comprehensive plan that balances your immediate needs with long-term goals.
Planning for the Future
The SECURE Act has changed the way inherited IRAs are handled, but with careful planning, spouses can still take advantage of the flexibility available to them. If you’re a spouse inheriting an IRA, taking the time to understand your options—and collaborating with a trusted financial team—can help you make the most of this asset while protecting your financial future.
Whether you’re considering a rollover, maintaining the account as inherited, or treating the IRA as your own, making the right choice can preserve your wealth, reduce your tax burden, and set up a strong legacy for the next generation.
Final Thoughts
Spousal inherited IRAs offer unique opportunities, but navigating them requires careful planning and a good understanding of the SECURE Act’s requirements. With guidance from your attorney, financial advisor, and accountant, you can craft a strategy that meets your financial needs now and supports your long-term legacy goals. Taking a proactive approach not only helps you make the most of your inherited IRA but also ensures that your wealth is protected and your wishes are honored.
If you’re navigating an inherited IRA and would like support, reach out to our office today. We’ll work with your financial team to help create a plan that fits your unique situation.
