When a spouse passes, organizing the finances is usually that last thing on your mind. For many widows and widowers, finding a financial planner, in addition to an estate planning attorney, to help in this process is a lifesaver. One of the areas where we see a lot of confusion surrounds the process for inheriting retirement accounts. When a spouse inherits an IRA or 401(k), the IRS provides special rules that give surviving spouses more flexibility with those accounts than non-spouse beneficiaries. Here’s a summary of the main options under current IRS guidelines (as of 2025). N.B. Please be sure to consult with your tax advisor or CPA prior to taking any action or making any changes to inherited accounts.
1. Inherited Traditional IRA (with a Spousal Beneficiary) - A surviving spouse who inherits a traditional IRA generally has three main choices:
Option A: Treat the account as their own IRA and complete a so-called spousal rollover. The spouse can move the assets into their own IRA (by transfer or rollover).
- Future RMDs (Required Minimum Distributions) are based on the spouse’s own age and life expectancy.
- If under age 59½, withdrawals may be subject to the 10% early withdrawal penalty (unless another exception applies).
- This is usually the best option if the spouse is older than 59½ or doesn’t need immediate access.
Option B: Keep as an Inherited IRA or a Beneficiary IRA. The spouse keeps the account in the decedent’s name, e.g. “John Smith (deceased 2025) IRA for benefit of Jane Smith, beneficiary.”
- RMDs are based on the spouse’s life expectancy (using the IRS Single Life Table).
- Distributions are not subject to the 10% early withdrawal penalty, even if the spouse is under 59½.
- Often best if the spouse is younger than 59½ and may need access to funds.
Option C: Lump-Sum Distribution. The spouse can withdraw the entire balance immediately. (Not generally recommended from a tax minimization perspective.)
- Subject to ordinary income tax on pre-tax amounts.
- No early withdrawal penalty regardless of age.
- This eliminates tax deferral, so it’s rarely the best choice except in special cases.
2. Inherited Roth IRA (Spousal Beneficiary)
- Spousal rollover: Surviving spouse can treat it as their own Roth IRA. No RMDs during their lifetime.
- Inherited Roth IRA: RMDs required if left as a beneficiary account, but distributions are generally tax-free if the Roth met the 5-year aging requirement.
- Lump sum: Can withdraw immediately, tax-free if the 5-year rule is met.
3. Inherited 401(k) (Spousal Beneficiary) - Rules are similar to IRAs but depend on the plan’s terms:
- Rollover to IRA: Surviving spouse can roll inherited 401(k) assets into their own IRA (traditional or Roth, depending on tax treatment).
- Inherited 401(k): Some plans allow the spouse to leave funds in the plan and take RMDs based on their life expectancy.
- Lump sum: Allowed, but taxable (unless Roth 401(k), then tax-free if qualified).
- Some 401(k) plans may force a distribution if the balance is below a certain threshold (often $5,000).
4. Required Minimum Distributions (RMDs)
- If the deceased had not reached their RBD (Required Beginning Date), the spouse can delay RMDs for inherited accounts until the year the decedent would have turned 73 (current RMD age under SECURE 2.0).
- If the spouse rolls it into their own account, RMDs are based on their own age.
- Roth IRAs (when treated as the spouse’s own) have no lifetime RMDs.
The IRS rules provide certain key advantages for inheriting spouses vs. non-spouses, including the ability to roll the deceased spouses retirement account into their own IRA (which is unique to spouses), greater flexibility on RMD timing and penalty-free access to the funds if the account is kept as an inherited IRA. Of course, there may be other tax consequences that you need to consider, so please consult with your tax specialist before taking any action.
Note: The information in this post is assumed to come from reliable sources, including the IRS, however it may contain errors. As such, this information is general in nature and is provided for educational purposes only and should not be used as the basis to make any personal financial, tax or investment decisions. Please consult a tax professional to more fully understand your own financial situation and the unique circumstances thereof. This blog post does not constitute advice in any form nor is it a solicitation of any kind, and should not be construed as tax, legal, investment or any other type of financial advice.