Inheriting the money in someone's IRA or 401(k) is different from inheriting other property. The IRS has detailed rules about these retirement plans, and if you don't follow them, you risk losing flexibility and tax benefits.
Spouses get special treatment when they inherit retirement accounts; they get more options than do other beneficiaries. (They may also have a right to claim some or all of the money, even if they were not the named beneficiary.) If you are a beneficiary of your deceased spouse's IRA or 401(k), you can:
To exercise any of these options, contact the company that administers the account. It will have its own paperwork for you to complete.
Even if you're under age 59½, the usual age at which penalty-free withdrawals are allowed, you can take money out of an inherited account in one lump sum without an early-withdrawal penalty. You will, however, have to pay income tax on the amount that you withdraw, so be aware of whether this amount of income will push you into a higher tax bracket.
Only surviving spouses can roll over inherited retirement assets into their own IRAs. If you do this, the money is treated just like your own IRA. You can make contributions to the account and the withdrawal rules are the same as if you had created the account in your name originally. If you're inheriting a traditional IRA, SEP-IRA, or 401(k), you must roll it over into a traditional IRA; if your spouse named you the beneficiary of a Roth IRA, you can roll it over into your own Roth IRA.
In the past, the benefit of rolling over a traditional IRA or 401(k) was that your required minimum distribution (RMD)—the amount you must take out annually after you reach a certain age (now 73, in 2023)—was based on your own age. In other words, if you were younger than your spouse, rolling over the account to your own IRA gave you the advantage of more tax-deferred growth. For example, if your spouse was over 73 and already required to take distributions, but you were under 73, you would not yet be required to take distributions. Even if you were over 73, your RMD amount would be smaller if you were younger than your spouse, since the amount is based on your statistical life expectancy.
Now, after the passage of the SECURE 2.0 Act, new rules make this less of a clear benefit. Beginning in 2024, the surviving spouse will be able to take RMDs based on their own age even with an inherited IRA. (They'll have to take steps to actively select this option.) But some might still choose to roll over an inherited account, for convenience's sake.
If you're under age 59½ and think you'll need to withdraw money in the next decade or so, however, don't roll over the account. Because a rolled over account is treated just as if it were originally your own, if you withdraw money before you're 59½, you'll be subject to a 10% early withdrawal penalty. If you converted the IRA to an "inherited IRA," (see below), this penalty would not apply.
You can roll over your spouse's Roth IRA into your own Roth IRA and keep making contributions if you are eligible under tax law. There are no required minimum distributions with Roth IRAs, so you don't have to worry about that part.
Generally, withdrawals from a Roth IRA are not subject to income tax. (That's because the contributions to the account were made with after-tax dollars, unlike most contributions to traditional IRAs.) However, if you withdraw money from a Roth IRA that hasn't been open for at least five years, you'll have to pay an early withdrawal penalty.
You can convert the existing IRA or 401(k) account into what's called an "inherited IRA." This may be a good idea if you're not yet 59½ and want access to the funds without an early withdrawal penalty.
You might need to take required minimum distributions each year. The exact amount of the RMD will be based on your statistical life expectancy. If your spouse was older than 73 at death, you must begin taking RMDs by the end of the calendar year following your spouse's death. (Or, as explained above, starting in 2024 you will be able to begin taking RMDs when you turn 73, if you elect this option.) If your spouse was younger than 73, you may be able to wait until your spouse would have turned 73 and been required to make withdrawals. (This can be advantageous if you were older than your spouse.)
(Note: If your spouse died between 2020 and 2022, the applicable age for RMDs was 72. Prior to 2020, that age was 70½.)
If you want to open an inherited IRA, it's important that you NOT take out money from the account. The transfer must be made directly from the old account to the new one, in what is called a "trustee to trustee" transfer. Otherwise, you could owe income tax on the money.
If you don't need the money and you'd rather it go directly to the contingent (alternate) beneficiary your spouse named, you don't have to accept it. This is called "disclaiming" the money. You must disclaim within nine months after the death of your spouse and before you take possession of the funds. Once you disclaim, you can't get the money back if change your mind.
Why turn down money? In certain family circumstances, it can make sense from a tax standpoint. (For example, if the beneficiary is in a lower income tax bracket than you are, the taxes on distributions will be smaller.) But note that under the rules of the SECURE Act, which became effective in 2020, most non-spouse beneficiaries must deplete the entire amount of the retirement account within 10 years. There are only a few exceptions:
Obviously, the rules governing the inheritance of tax-advantaged retirement accounts are complex—and they change. Before you take any action, and especially before you touch the money in a retirement account you've inherited, consult someone with experience with transferring these accounts. Most plan administrators have specially trained advisers who can explain your options; talking to them is a good place to start.