Inherited IRAs and spousal IRAs are two different types of accounts that you can use for retirement planning. An inherited IRA is created when someone inherits that account, often from a non-spouse. A...
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Inherited IRAs and spousal IRAs are two different types of accounts that you can use for retirement planning. An inherited IRA is created when someone inherits that account, often from a non-spouse. A spousal IRA allows working spouses to contribute to the account for non-working or low-earning spouses. A financial advisor can help you understand how these accounts work and use them effectively when they apply to your circumstances.
An inherited IRA is a type of retirement account that is passed on to a beneficiary after the original account holder’s death. The key feature of an inherited IRA is that it allows the beneficiary to continue benefiting from the tax advantages associated with the original IRA.
Whether the original account was a traditional IRA or a Roth IRA, the inherited version maintains similar tax-deferred or tax-free growth benefits. The rules governing withdrawals and distributions, however, can differ significantly from those of the original account.
Some savers in the past employed the stretch IRA strategy, which allowed beneficiaries to take distributions over their own lifetime. The SECURE 2.0 Act of 2019, however, eliminated this by introducing the requirement for most non-spouse beneficiaries to withdraw the entire balance of an inherited IRA within ten years of the original account holder’s death.
The tax treatment of an inherited IRA depends on the type of account and the beneficiary’s relationship to the original owner. For Traditional IRAs, distributions are generally subject to income tax, while Roth IRA distributions are typically tax-free if the account was held for at least five years.
Beneficiaries of an inherited IRA should carefully plan their withdrawals to manage their tax liabilities effectively. Consulting with a financial advisor can provide valuable guidance in navigating these complexities and optimizing the tax benefits of an inherited account.
A spousal IRA allows married couples to maximize retirement contributions, even if one spouse does not earn an income. Typically, this would not be possible with a regular IRA, because the account holder must have earned income to make contributions.
The spousal IRA lets working spouses contribute on behalf of a non-working or low-earning spouse to an IRA. This provision can help when one partner takes time off work for caregiving or other reasons.
To qualify for a spousal IRA, couples must file a joint tax return so that the IRS can verify the couple’s combined income and contribution eligibility. The contribution limits for a spousal IRA are the same as those for traditional and Roth IRAs.
Both spousal and inherited IRAs are commonly confused because they involve spouses. However, each serves entirely different purposes and are applied in different situations. In short, spousal IRAs are for active contributions during a couple's lifetime, while inherited IRAs come into play after the account owner's death and focus on distributing assets. Here are four key distinctions:
Inheriting an IRA as a spouse can be a complex process. Here are four useful tips to help unpack your options:
Spousal IRAs and inherited IRAs offer distinct benefits and considerations. An inherited IRA is typically established when a beneficiary inherits an IRA, allowing them to continue benefiting from the account’s tax advantages. A spousal IRA allows a working spouse to contribute to an IRA on behalf of a non-working or low-earning spouse
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