Regular readers know that I think a big part of retirement stewardship is having plans and documentation in place so that things go as well as we have hoped and prayed for after we’re gone, especially for our spouse should we predecease them.
I sometimes refer to this in principle as “loving your widow.” Depending on who manages the family’s financials, it could also be a case of “loving your widower” or “loving your . . . ” [fill in the blank]. It’s based on verses like 1 Tim. 5:8, Psalm 20:4, Prov. 21:5, Prov. 21:1, Luke 14:28 that stress taking care of one’s family and wise planning due to future uncertainty.
I touched on this in an earlier article, but the IRS rules on inherited IRAs and how they are distributed and taxed are important and sometimes confusing. Plus, they have changed as a result of the SECURE Act 2.0, which was enacted in 2022. The IRS clarified some of its delayed provisions this year that will take effect in January 2025.
This pertains to spouses who inherit an IRA, children, other humans, and non-humans, such as charitable organizations. I don’t know how it would apply to pets (I have a young dog); perhaps they would be treated as non-humans, which they are (but don’t tell them that).
This article will focus on surviving spouses, which the IRS classifies as “eligible beneficiaries.” Non-spouse beneficiaries are—you guessed it—”non-eligible” beneficiaries. I’ll touch on them at the end of this article.
In either case, they must also be “designated beneficiaries” as defined by the IRS.
Our situation
I have designated my wife as the primary beneficiary of my IRA accounts. Most people do this; it’s the simplest way to ensure those assets pass directly to her so she’ll have the money to live on for the rest of her life. (If you haven’t named a primary beneficiary for yours, I suggest you do it now!)
I wrote a personal letter to my wife that I update periodically and keep with my will and other final documents that I call ”A Letter From Your Husband Who is Now in Heaven.” In it, I inform her how to access the IRA accounts online at Fidelity. I also wrote the following:
“If I have reached age 73, I am withdrawing an amount at least equal to what the IRS requires as a “Required Minimum Distribution” (RMD)” and I suggest that she get some help from Fidelity or whatever advisor I may be working with at the time or one of your choosing to understand the implications of that for you as the inheriting spouse.”
I have discussed RMDs with her before, mainly to let her know that they’re not a big deal for us since we’re already withdrawing money from our IRA in an amount roughly equal to an RMD. I’ve also started making Qualified Charitable Distributions (QCDs) since turning 70½, which will count toward our RMDs when I reach age 73.
As my surviving spouse, she receives the most preferential tax treatment when distributing the account’s assets after I’m gone. However, this is also where things get more complicated.
Furthermore, it’s when mistakes can be made. A surviving spouse has options, and each has pros and cons. Therefore, some need to take the time to look at them more closely to make the optimal choice.
In this article, I’ll touch on two scenarios and their respective distribution methods under current IRS rules, including the changes enacted as part of the SECURE Act 2.0.
I own both a Traditional IRA and a Roth IRA, with the former being the largest. This article will focus on the traditional account, as a spouse’s inherited Roth IRA is treated like the original owner’s. (It’s different for Roth IRAs inherited by a non-spouse; more on that later.)
Different scenarios
The available options will vary depending on the IRA owner’s age at the time of their passing and whether they were already taking RMDs from the account.
Scenario #1 — Deceased IRA owner was under RMD age (73 or 75 if born after 1960)
Since I am age 72, this scenario would apply to my wife (and any spouse in the same situation), but only if I pass away in the next year (which won’t happen, Lord willing).
The choices are a little different than what non-spouse beneficiaries have and are more favorable in some respects:
Spend It: Yes, that is an option. A spouse could withdraw all the money as a lump sum and spend it (after paying taxes, of course). This is definitely in the category of “just because you can do something doesn’t mean you should.” On the other hand, if they can afford it, a little splurge—either on themselves or others—may not be a bad idea.
Disclaim the Account: My wife could “disclaim” or elect not to inherit the account, but I don’t think she would, nor can I think of a good reason why she would (although some people do, mainly for tax reasons, I think).
Spousal Transfer: If my wife had her own IRA (she doesn’t), she could roll over the funds from my Traditional IRA into her own existing IRA. That’s the most straightforward option for most spouses with a Traditional IRA, as it would treat the funds as if they were always theirs.
However, since my wife doesn’t have an IRA account, this one doesn’t apply to her. For those who do, if they roll It into their own IRA, they’ll follow the standard rules for RMDs, which kick in at age 73 (or age 75 if they were born in 1960 or later).
When the time comes to calculate the RMD amount, they’ll use the Uniform Life Table based on their age and life expectancy, which will be recalculated annually (more on the “tables” shortly).
This option could give the account more time to grow tax-deferred, especially for younger spouses who don’t need the money immediately. It’s especially beneficial for spouses under age 59½ who may need to withdraw early, as it avoids the 10% early withdrawal penalty.
Inherited IRA: My wife can continue as a beneficiary, take the inheritance, and leave the assets in the inherited IRA account in my name. For IRS purposes, it is technically considered an “inherited IRA.” This is the best option for her, even after I reach RMD age (73).
With this option, if I were to die before age 73, she would have to start taking RMDs in the year in which I would have reached age 73, as opposed to the year in which she did. That is somewhat irrelevant to us as she is a little older than me (by 6 months).
Under the old IRS rules, once she started taking RMDs, the amount would have to be calculated annually based on her remaining life expectancy from the “Single Life” table in IRS Publication 590-B, as opposed to the “Uniform Lifetime” table that is used during the original account owner’s lifetime.
But that changed with SECURE Act 2.0 and new rules that took effect in 2024. The new law allows her to calculate her RMDs using the Uniform Lifetime Table instead of the Single Lifetime Table, which keeps them the same as they would be if I were still the owner and could be more beneficial to her regarding her annual tax obligation.
By the way, these are actuarial tables that the IRS uses for computing RMDs. They are updated infrequently—the last time was 2021. Both are contained in IRS Publication 590-B. The Uniform Life Table is more advantageous for calculating RMDs because it considers the couple’s lifespan, usually longer than any individual spouse.
To illustrate, here’s the Single Life Table that was required under the old rules:
Let’s assume my previous year’s IRA balance was $500,000. To calculate her first RMD using this table, my wife would divide that amount by her life expectancy at age 73 by 16.4: $500,000 / 16.4 = $30,488, which equates to a 6.1% withdrawal percentage, almost twice as much as I am withdrawing currently.
Here’s the Uniform Lifetime Table that can be used under the new rules that took effect this year:
Recalculating the example above, my wife would divide $500,000 by the factor in this table for age 73, which is 26.5: $500,000 ÷ 26.5 = $18,868, a 3.8% withdrawal rate.
That is a difference of $19,356 or 3.9%, which is significant. At a 22% marginal tax bracket, that would be an annual tax savings of $4,258, which can stay in the account and continue to grow. For most people, the longer you spread out the distributions, the better; you pay less in taxes each year, and the remaining balance has more time to grow.
Scenario #2 — Deceased IRA owner was at or over RMD age (73 or 75 if born after 1960)
Similar to Scenario 1, the spend it all, disclaim it, and rollover options are available in this scenario. However, with an inherited account, my wife would now have the option to be treated by the IRS as though she were the original account owner, which is a change to the pre-SECURE Act 2.0 rules.
Here’s how that works: Her RMD would be calculated using the GREATER of her life expectancy using the Uniform Lifetime Table or my life expectancy using the Single Life Table (using my age at the time of death minus 1 for each year after that).
Because my wife and I are the same age, using the Uniform Lifetime Table will be the optimal choice. However, a spouse ten or more years older may want to use the deceased owner’s life expectancy to calculate their RMD.
This decision would be a no-brainer for my wife, and the RMDs for my account would remain the same. However, for others, the best choice would depend on each spouse’s age.
This may not matter to many
Most people don’t just choose to take their required RMD and call it a day. How much they withdraw will depend on multiple factors, including age, expenses, other income sources, and tax considerations.
Many of us will withdraw more money from our IRAs than the IRS requires. If we do, it’s because we need to or want to for some particular purpose (travel, home repairs, charitable contributions, etc.).
For those already withdrawing more than their RMD, lowering the required amount won’t have much impact. They’ll keep making larger-than-IRS-required distributions to satisfy their needs, wants, or both.
Still, it’s wise to understand the tax rules to prepare you and your surviving spouse for any situation.
Other beneficiaries
This is a significant topic in itself, but SECURE Act 2.0 also changed the distribution rules for most non-spouse beneficiaries of IRAs, 401(k)s, and other retirement accounts. These rules also apply to inherited Traditional and Roth IRA and 401(k) accounts.
Such beneficiaries (think children or grandchildren) used to be able to “stretch” distribution over their life expectancy, similar to a surviving spouse. However, under the new rules, they must withdraw the entire balance by the end of the 10th year after the owner’s death.
This new rule compresses the distributions and taxes (except for Roth accounts) owed into a shorter timeframe—good for the IRS but not so good for the heir. Larger annual distributions can push heirs into a higher marginal tax bracket.
Great professional advice
I plan to add some verbiage to my “letter” to explain this to my wife as best I can. However, most surviving spouses should consult a professional advisor or a tax accountant to help them make the right decision.
