Much like life insurance or annuity proceeds, assets in an individual retirement account (IRA) are passed to a named beneficiary in the event of the account owner’s death. There are many advantages to this arrangement, not least of which is that by naming a beneficiary for the account, the owner will usually be able to pass the proceeds to the IRA beneficiary without the expense or delay of probate. Naming a beneficiary for such accounts, then, can also be a useful tool for estate planning.
In many cases, married persons who hold IRAs will name their spouse as the primary beneficiary so that, in the event of their death, their spouse receives ownership of the assets. Spousal IRA beneficiaries enjoy greater flexibility and more choices for how they handle these inherited assets, and the most advantageous method depends on the surviving spouse’s unique situation. Let’s explore the options available and suggest how they might best serve various scenarios.
IRA Basics
First, it’s important to remember that there are two kinds of IRAs: traditional (funded with pre-tax funds), and Roth (funded with after-tax funds). Pre-tax funding means that deposits to traditional IRAs are deductible from taxable income (subject to certain income limitations), and when the money is withdrawn in retirement, it is taxed as ordinary income. After-tax funding means that deposits to Roth IRAs are not deductible from taxable income, but when funds are withdrawn from a Roth IRA in retirement, they are not taxable as ordinary income. Roth IRAs also limit who may contribute; in 2026, married taxpayers with more than $242,000 in modified adjusted gross income (MAGI), are allowed limited or no contribution to a Roth account. In both accounts, funds accumulate and compound without taxation as long as they remain in the account. Withdrawals from either a Roth or a traditional IRA before the owner reaches age 59 ½ are generally taxable and also carry an extra 10% tax penalty. For both traditional and Roth IRAs, the 2026 maximum contribution limit is $7,500.
Another difference between traditional and Roth IRAs lies in when the money in the account must be withdrawn. Traditional IRAs are subject to required minimum distributions (RMDs). Persons age 73 or more (born in 1953 or earlier) must take a minimum withdrawal from their IRA, based on the account owner’s age and the balance in the account. Roth accounts, however, have no RMDs for the account owner, though non-spousal beneficiaries who inherit Roth accounts must generally withdraw the funds over a 10-year period after receiving ownership of the account.
What Are the Options for a Spousal IRA Beneficiary?
Unlike the non-spousal beneficiaries referred to above, spouses with inherited IRAs have more choices about how to handle the funds in the account.
1. Keep the account as an inherited IRA. A spouse who inherits an IRA may decide to hold the funds in an inherited (or beneficiary) IRA.
- If a traditional account is already subject to RMDs, they would continue to receive the distributions, but they would be calculated on the beneficiary’s age, rather than that of the original account holder.
- If the traditional account is not yet subject to RMDs, the spousal beneficiary could elect to wait until their own age 73 to begin taking RMDs.
- If the account is a Roth account, no RMDs are required, and the spouse may elect to maintain the account or take tax-free income from it, as dictated by need.
- Spousal beneficiaries younger than 59 ½ who own inherited IRAs have the ability to take withdrawals from the account and avoid the 10% tax penalty.
2. Roll the account over to an IRA owned by the beneficiary. This option is only available to spousal beneficiaries. It should be noted that beneficiaries younger than 59 ½ who roll an inherited IRA over to their own accounts lose the ability to take withdrawals and avoid the 10% early withdrawal penalty.
Remember, a non-spousal beneficiary does not have the option, even with a Roth account, to simply leave the funds in the account; they are required to liquidate the account over no more than a 10-year period.
What Are the Tax and Income Implications of Inheriting a Spousal IRA?
Based on the above information, spousal IRA beneficiaries should review their tax and income situations before making a decision about how to handle the assets in the inherited account. Consider the following scenarios:
- Spousal beneficiary with ample income, older than 59 ½, Roth IRA. If the spouse does not require income from the account, they may wish to do a rollover, allowing the assets to continue accumulating. Alternatively, if they are in a higher tax bracket, they may wish to draw tax-free income from the account, replacing taxable sources.
- Spousal beneficiary with ample income, older than 59 ½, traditional IRA. If the spouse is in a higher tax bracket, they may wish to avoid taking the additional taxable income as long as possible, assuming the account is not yet subject to RMDs. If it is, or when RMDs begin, they may wish to gift the distributions to a favored charity via a qualified charitable distribution (QCD), both avoiding taxation on the income and potentially generating a charitable deduction.
- Spousal beneficiary, limited income, younger than 59 ½, traditional or Roth IRA. If the spouse needs to generate income from the account, holding the assets in an inherited/beneficiary IRA would permit penalty-free withdrawals, which would be taxable as ordinary income.
- Spousal beneficiary, ample income, younger than 59 ½, Roth IRA. The spouse may be well advised to roll the funds over to their own IRA. They can then continue to obtain tax-free growth of the assets and have the option to take tax-free income in retirement. If the income is not needed, they may simply allow it to pass to a chosen beneficiary.
Does a Roth Conversion Make Sense for a Spousal IRA Beneficiary?
Spousal IRA beneficiaries also have the option of converting traditional IRA assets to Roth accounts. Because retirement withdrawals from Roth accounts are generally tax-free, this strategy makes the most sense for beneficiaries who believe they will be in a higher tax bracket in retirement than presently. It is also advantageous for those who wish to avoid RMDs. Taxes must be paid on the amount converted.
At The Planning Center, we work carefully to make sure clients are aware of their available options. Our fiduciary duty obligates us to provide all the information necessary for a decision that keeps your best interests foremost. If you have questions, we want to help you find the answers you need.
