Making financial decisions after a spouse dies can obviously be overwhelming.
Grief can cloud judgment, unfamiliar responsibilities may arise, and complex paperwork can add stress. Every decision can feel heavy, and sometimes I think folks want to just do whatever is quickest and easiest, which is understandable.
However, deciding on what to do with your spouse’s retirement accounts is more complex than ever. Some of the options have been impacted with by the SECURE 2.0 Act, passed in December 2022, which introduced some changes to financial planning methods. While some changes took effect immediately, others are still being phased in gradually.
For example, beginning in 2026, people over age 50 who want to take advantage of additional retirement savings via the catch-up provision will find that if their salary is too high, they will be required to contribute those extra savings to a Roth 401(k) instead. (For more on Roth savings, listen to THIS EPISODE of The Novice & The Nerd podcast.)
As always, don’t feel like you must make big decisions on your own. The team at StrategicPoint Investment Advisors is here to support you. Lean on us, and let’s tackle it together.
Commingling IRAs
Typically, when a married individual passed away, the remaining spouse would inherit the IRA and combine their late spouse’s assets – IRA or 401(k) – with their own.
Here’s an example of a married couple, each with their own retirement accounts.
SCENARIO 1
60-year-old husband has $425k in his IRA
58-year-old wife has $150k in her IRA
Let’s say the husband passes, leaving his wife with his retirement assets.
SCENARIO 1
58-year-old surviving wife now has $575k in a combined IRA.
This is how most people handled the situation as it was standard protocol to put all the married couple’s retirement assets in the surviving spouse’s name, but this decision may not always be optimal for folks.
More Flexibility with Inherited IRAs
In general, if you withdraw money from your IRA prior to age 59 ½, not only is the distribution taxed, but there is also a 10 percent penalty on the gross amount. This penalty is the IRS’s way of dissuading people from using their retirement accounts before retirement age. However, Inherited IRAs never have the 10 percent penalty applied to distributions, and this new flexibility could be beneficial to a surviving spouse.
Let’s use the previous scenario as an example. The 58-year-old surviving wife could open an Inherited IRA and access funds left behind by her husband prior to her turning 59 ½ without the penalty. If she had chosen to commingle the retirement assets into an IRA in her name, and then tap the funds she would have been penalized that 10% for accessing them prior to attaining age 59 ½.
While this path adds complexity – maintaining two IRAs with different rules – the flexibility may be invaluable, allowing access to funds without incurring early withdrawal penalties.
A Hybrid Strategy: Withdraw Now, Combine Later
For some surviving spouses it may make more sense to delay commingling IRAs, offering a hybrid strategy: take penalty-free withdrawals now and combine accounts later once the surviving spouse reaches age 59 ½.
A surviving spouse could:
1. Open an inherited IRA
2. Make penalty-free withdrawals, if needed
3. Combine the inherited IRA with their own IRA after reaching age 59 ½
SCENARIO 2
60-year-old husband has $425k in his IRA
58-year-old surviving wife has $150k in her IRA
SCENARIO 2
60-year-old husband passes away.
58-year-old surviving wife now has $575k in a commingled IRA.
Tapping these assets prior to age 59 ½ incurs a 10 percent penalty from the IRS.
New SCENARIO 2
60-year-old husband passes away.
58-year-old surviving wife has:
• Her original IRA with $150k (10 percent penalty applies)
• A new Inherited IRA with just late husband’s retirement assets: $425k (exempt from 10 percent penalty; taxes still apply)
• When she turns 59 ½ she can combine the Inherited IRA assets with her own, since there is no visible need to have two different accounts anymore!
This scenario is probably the most logical one for most people, in that it allows for the flexibility. Even if you don’t THINK you’ll need to tap the funds, why not at least give yourself the option in case some unforeseen emergency arises.
Delaying RMDs with an Inherited IRA
We’ve shown how these rules may help someone, if they inherit an IRA from a spouse prior to age 591/2. Let’s talk about the other rule change that could be beneficial, for older folks.
Surviving spouses over the age of 59 ½ may still want to consider keeping IRAs separate. Inherited IRAs provide an opportunity to delay required minimum distributions (RMDs) until the deceased spouse would have reach RMD age (73 or 75, depending on birth year).
Let’s imagine another scenario and update the couple’s ages:
SCENARIO 3
70-year-old husband has $425k in his IRA
62-year-old wife has $150k in her IRA
If the wife passes away, the husband inherits her IRA.
SCENARIO 3
62-year-old wife passes away.
70-year-old husband now has $575k in a commingled IRA. RMD would have to start when he hits age 73 or 75, depending on the birth year.
In this scenario, once the surviving husband reaches HIS age of RMD (73 or 75) he will be required to take an RMD on the total amount of the IRA, the new IRA value of $575k.
However, perhaps, he could choose to open an Inherited IRA for the wife’s IRA assets and keep their retirement assets separate. With an inherited IRA like this, the surviving spouse is NOT required to take ANY RMD until the year that his late wife would have reached her OWN RMD age (73 or 75), which is 8 years after the surviving spouse had to take his RMD.
SCENARIO 3
65-year-old wife passes away.
70-year-old surviving husband has:
• His original IRA with $425k
• A new Inherited IRA with $150k (surviving husband can delay RMD until decedent would have turned 73 or 75)
This strategy may appeal to retirees looking to reduce income during peak tax years or avoid unnecessary withdrawals.
Know Your Options and Consult a Professional
Losing a loved one is never easy. Fortunately, surviving spouses have options to make thoughtful, tax-smart financial decisions.
These spousal election choices may be confusing, and the best path forward isn’t always obvious. That said, these updates have strong potential to work in your favor when used strategically. Feel free to reach out to us to schedule a meeting if you or a loved one is struggling to understand the financial implications of these decisions.
Derek Amey serves as Managing Partner and CIO at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.
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