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Spousal vs. Non-Spousal Beneficiaries

Among the advantages that married couples enjoy is a special treatment of IRA accounts when a spouse is the sole beneficiary. A spouse who is the sole beneficiary is permitted, upon the death of the IRA owner, to rollover his IRA into her own IRA (establishing her own IRA if she doesn’t already have one.) 

There is no tax due, and the IRA is effectively hers. She will be able to assign new beneficiaries if desired.  Even if her spouse was over 70 ½ and taking required distributions, she will not be required to take distributions until she is 70 ½ herself.  This spousal rollover benefit applies to Roth IRAs as well. 

Non-spousal beneficiaries must begin to take distributions from an inherited IRA the year after the death of the IRA owner regardless of their age. The IRA must remain in the deceased person’s name; a non-spousal beneficiary can never roll the IRA over into their own name. 

Here are two important items to know. The spouse must be the sole beneficiary in order to secure this benefit. If your estate plan requires that your IRA be split equally among, say, a spouse and three children, it is much better to divide the IRA now, and make the spouse 100% beneficiary of one quarter of the IRA value, and the children each 33 1/3%  beneficiaries of the remaining three quarters. 

Additionally, there is one situation when a spouse should not rollover a deceased spouse’s IRA. If the surviving spouse is under the age of 59 ½ and needs income, she would be subject to a 10 percent penalty should she withdraw money from her IRA. In these circumstances, the surviving spouse can leave the IRA in the deceased spouse’s name, and take distributions without penalty. When she reaches the age of 59 1/2, she can still choose to rollover the IRA into her own IRA. 

Steven Weber
The Bedminster Group

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