Options for IRAs after death of spouse

Kelly Greene

What are the rules for spouses who inherit IRAs? My mother is the sole beneficiary of my father's traditional IRA. He was 72 when he died in 2006 and had started taking required minimum distributions. My mother was 67 when he died, and she is now 68. Is she required to begin taking required minimum distributions, even though she is not 70-½ years old?

Diane Roem

Lakewood, Colo.

Your mother should have a few more years to go before she has to start making any withdrawals from your father's IRA – as long as she doesn't treat the account as an inherited IRA.

You typically have three options as a widow or widower inheriting an Individual Retirement Account from a spouse: You can roll it over into your own IRA, elect to treat it as your own (meaning it simply stands as a separate account) or retitle it as an inherited account and take required distributions every year as any other IRA beneficiary would have to do.

“The best move generally is to roll it over into your own account,” said Ed Slott, an IRA consultant in Rockville Centre, N.Y. “Once you do a rollover, the money is treated like it was always in your own IRA.”

That means you would follow the normal withdrawal requirements for your own IRA.

To roll over assets from your father's IRA to her own, your mother has two options: She can do what's called a trustee-to-trustee transfer, or direct transfer, in which the assets go straight from your father's IRA to her own, or she can simply withdraw the assets from his IRA and redeposit them into her own IRA within 60 days. Slott recommends doing a direct transfer, because the 60-day deadline can sneak up on you. If you miss that deadline, you can no longer put assets into your own IRA – and you owe income tax right away.

But there's also a provision in the tax rules that allows a surviving spouse to treat the account as his or her own, Slott said. By not taking a required distribution in 2007, your mother would have made that election, and no distributions would be required until she reaches her own date for making required withdrawals. (Specifically, she doesn't have to take her first distribution until April 1 of the year after the year in which she turns 70-½ years old.)

The only way your mother would be required to make withdrawals at this point is if she chose to act as a “regular” (nonspousal) IRA beneficiary, which would involve designating your father's account as an inherited IRA and taking the required distribution in the year following the year of his death. This wouldn't be an advantage for your mother, but it can be for a surviving spouse who may need to make IRA withdrawals before reaching age 59-½.

Withdrawals from an inherited IRA are exempt from the 10 percent penalty on early distributions. (One note: Whether you make withdrawals earlier or later as a spouse, you still owe income tax on the distributions – unless you inherit a Roth IRA.) Then, when the spouse reaches age 59-½, he or she can roll the inherited IRA into his or her own IRA.

Widows and widowers are the only IRA beneficiaries who have all these options. If you inherit an IRA from anyone other than your husband or wife, you have to retitle the account as an inherited IRA, keep it separate from your own and follow the Internal Revenue Service's withdrawal rules to keep the account intact. The rules are spelled out in Publication 590 at irs.gov.

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