In order to explain how a traditional surviving spouse IRA operates, you must first understand how it would work for you during your lifetime. Funds that you have contributed to your traditional IRA investment account are untaxed earnings, and will be allowed to grow with investment income, which will then be taxed together as ordinary income upon withdrawal.
Unless you are disabled or withdraw the funds under some other statutory exemption, there will also be an additional 10% early withdrawal tax for withdrawals made prior to age 59½. Otherwise, you must start taking withdrawals from your IRA at age 70½, which is called the Required Beginning Date (RBD).
The first withdrawal must be made by April 1 of the year following the year that you reach age 70½. Subsequent withdrawals must be made by December 31 of each year, including one in the same calendar year as the RBD. The minimum amount that must be taken out is called the Required Minimum Distribution (RMD). This amount is found in an IRS chart called Publication 590.
Options if the decedent was under age 70 1/2
A surviving spouse named as the beneficiary of the decedent’s IRA has a number of options available, which depend upon whether or not the decedent was under or over age 70½ at the time of death.
If under age 70½, the surviving spouse has four choices. If the spouse is the sole beneficiary, he or she may transfer the assets into an existing or new IRA. Withdrawals under this option would be treated just like the spouse having earned the funds and put them into his or her own IRA. Under the second choice, the funds would be transferred to an Inherited IRA in the survivor’s name. There is no early withdrawal penalty, but all funds must be withdrawn by December 31 of the 5th year after the death of the decedent.
The third choice would require a distribution to the surviving spouse no later than December 31 after the year of death or the year that the decedent would have reached age 70½, whichever is later. The amount of the distribution would be based on a choice of either the surviving spouse’s life expectancy, or the decedent’s remaining life expectancy under the IRS table. This option has no early withdrawal penalty, and can also be used when there are a spouse as well as non-spouse beneficiaries, except that the accounts must be established no later than December 31 after the year of the date of death. The fourth choice would be a lump sum payment at death to the spouse, for which there is no early withdrawal penalty.
Options if the decedent was over age 70 1/2
If the decedent is over age 70½ at the time of death, the surviving spouse has three choices. If the spouse is the sole beneficiary, he or she may roll over the account to an existing or new IRA. This would be treated just like the surviving spouse had earned the funds with his or her own IRA, including an early withdrawal penalty. The second option would be for a surviving spouse IRA, “Inherited IRA”. The spouse must take a RMD no later than December 31 of the year following the decedent’s death, but the RMD is based upon the longer of the spouse’s life expectancy or the decedent’s remaining life expectancy. Under this option, there can also be non-spouse beneficiaries. There is no early withdrawal penalty. The third option would be a lump-sum distribution, and there would be no early withdrawal penalty.
These rules are somewhat complicated and not all details are provided in these examples. Therefore, it is very important that specific tax advice be obtained before any decisions are made.
Neal Winston is the principal of Winston Law Group, a Boston law firm specializing in estate planning, probate, special needs planning, elder and disability law. A nationally recognized expert on special needs counseling and trusts, and public benefit programs, Neal is frequently requested to lecture and train other attorneys and professionals that work in this field.