Understanding your options as a spouse beneficiary is very important, and you need to factor in the tax considerations for each option. For example, you may want to keep the IRA assets growing tax-deferred as long as possible for yourself or for future generations. Or you may need the funds now and want to take a lump-sum distribution—in which case there are immediate tax consequences. Consider your decisions very carefully, because some may be irrevocable.
Understanding your options
A spouse beneficiary has five options when receiving an IRA inheritance: assuming the IRA, inheriting the IRA, taking a lump-sum distribution, disclaiming the IRA, or electing Vanguard's pass-through service. Each option has its own tax consequences and some options are irrevocable. We strongly suggest consulting a qualified tax professional or attorney to determine the best course of action for your particular situation.
Assuming the IRA
When you assume an IRA, you transfer the assets into an IRA in your name and the IRS treats the IRA as if it had always been yours. You may select this option only if you are the surviving spouse of the original account owner and the sole primary beneficiary of the account.
If you assume an IRA, you:
Can take advantage of the power of compounding through the IRA's tax-deferred status.
Can simplify account management by moving the assets from your spouse's IRA into your existing IRA.
Don't have to take required minimum distributions (RMDs) from a traditional IRA, SEP-IRA, or SIMPLE IRA until you reach age 70½. (If you assume a Roth IRA, you can avoid RMDs during your lifetime.)
May make additional contributions to the IRA, subject to IRS regulations.
Note: Traditional IRAs, SEP–IRAs, and SIMPLE IRAs can only be assumed into traditional IRAs. Roth IRAs can only be assumed into Roth IRAs.
Inheriting the IRA
When you inherit an IRA, you take the account as a beneficiary (for your benefit) and withdraw from it over a fixed period of time.
If you inherit an IRA, you:
May take money from the account without any tax penalty, regardless of age. Even if you're under age 59½, you will not be subject to an "early withdrawal" penalty from the IRS.
May delay taking distributions if you were older than your spouse. You may wait until the year in which your spouse would have reached age 70½ or December 31 of the year following your spouse's death, whichever is later. This option may be desirable if you won't need the assets in the near future.
Can assume it later if you choose.
Taking a lump-sum distribution
You may decide to take a lump-sum distribution after the assets are transferred into your name. These funds can then be deposited into your Vanguard non-IRA account, or sent to you directly. However, you'll lose the benefits of tax-deferred investing. Also, since you must report the distribution to the IRS as ordinary income for the year in which you received it, there can be negative tax consequences to you—depending on your specific situation—especially if the distribution is a significant amount.
Options for special circumstances
The following two options are applicable in certain situations. We strongly suggest consulting a qualified tax professional or attorney to determine the best course of action for your particular situation.
Disclaiming the IRA
You may refuse to accept ownership of the IRA assets, either in part or in full. The assets refused will then pass to any remaining primary beneficiaries or, if none exist, to any secondary beneficiaries. The decision to disclaim assets is an irrevocable election with special rules.
Some special options may be available to you if your spouse designated a trust for your benefit or your spouse's estate as the IRA beneficiary. If you're the beneficiary of an IRA through a trust (or your spouse's estate), you can take advantage of Vanguard's pass-through service. With proper authorization from the trustee of the designated trust or, in the case of your spouse's estate as beneficiary, the representative of the estate, we'll transfer the assets to an account in your name.
For both of the above options, in addition to consulting with your own advisor, you'll also need to contact Vanguard to discuss the necessary documents and instructions needed.