By Andy Ives, CFP®, AIF®
A surviving spouse has a number of options regarding how to deal with IRAs inherited from his or her deceased spouse. The age of both the deceased and surviving spouse will most often dictate the decision as to how to proceed. Typically, a surviving spouse who is age 59 ½ or older will do a spousal rollover with the assets. A spousal rollover allows the surviving spouse to consolidate the inherited IRA into her own, thereby minimizing future paperwork and confusion. She will have full and unfettered access to the assets (other than potential taxes due).
For surviving spouses who are under age 59 ½, the option to keep the inherited assets as a beneficiary (inherited) IRA often makes the most sense. This strategy acts as a safety net should she need access to the inherited IRA dollars. As a beneficiary IRA, the surviving spouse would have full access to the inherited assets, penalty free. At age 59 ½, she can do a spousal rollover, thereby consolidating the inherited IRA into her own. At that point, when she is over age 59 ½, the 10% penalty will never again apply. (Note: there is no deadline to complete the spousal rollover. Even if her husband tragically died when she was only in her 30’s, she could elect an inherited IRA, have full access to the dollars, and then do a spousal rollover 20+ years later.)
On occasion, surviving spouses will elect to split the inherited IRA assets, which is permitted. The surviving spouse might choose to move half of the money into her own account (spousal rollover) and keep the other half as an inherited IRA. One rationale for such a split could be to limit the under-age 59 ½ spouse’s access to inherited dollars by leaving a smaller portion in the beneficiary IRA. The reasons for splitting are far and wide.
This permission for surviving spouses to split inherited IRAs raises an interesting question. We know that, under the SECURE Act and recently clarified by the IRS, an eligible designated beneficiary (EDB) can choose the 10-year payout OR choose to stretch inherited IRA payments over his or her own single life expectancy. However, this choice is only available if the deceased IRA owner dies prior to his required beginning date (RBD). If the deceased owner is past his RBD, the EDB can only stretch payments. (You cannot elect to stop RMDs via the 10-year payout option.)
Is an EDB, like a surviving spouse, also allowed to split an inherited IRA, thereby choosing the 10-year payout option on part of the assets, and stretching the rest? This question is unknown as it is not addressed in the SECURE Act.
Example: Two adult brothers, ages 60 and 61, die in a car crash. Both deceased siblings owned their own IRA and named their younger sister Grace, age 55, as their primary beneficiary. Grace is an EDB as she is “not more than 10 years younger” then either of her older brothers. Since both of the brothers died before their RBD, Grace can choose to stretch payments over her own life expectancy, or she can choose the 10-year payout option.
If she wanted to, it seems completely reasonable that Grace could stretch one of the brother’s IRAs and choose the 10-year payout for the other. After all, these are two different decedents. But could she split one of the IRAs, stretching a portion and taking the 10-year on the other portion? That is a question that is still unknown.