There are three options when a spouse inherits an IRA. First, they can roll the inherited IRA into their own new or existing IRA and base both the timing and amount of minimum required distributions (MRDs) on the IRS' Uniform Lifetime Table. This assumes distributions extend over two lives-the inheritor's and a beneficiary who is 10 years younger than the inheritor. That has tremendous advantages for a spouse who hasn't reached 70 1/2 yet, but whose partner had, because it allows the recipient to wait until he or she is 70 1/2 before beginning MRDs. That means the timing of MRDs and the yearly withdrawal amount will be based on the surviving spouse's life (as interpreted in the IRS' Uniform Life Expectancy Table).

"If the spouse is younger than 70 1/2, they're also eligible to make annual contributions to the IRA, which increases the power of tax deferral and compounding," Miller says.

There is, however, a downside to spousal rollovers. If the inheriting spouse is not yet 59 1/2 but needs cash from the IRA, he or she will be subject to the 10% early withdrawal penalty. One exception, which provides an end-run around the 10% penalty, allows recipients to take substantially equal periodic payments, which can be stopped without penalty after five years or when the inheritor turns 59 1/2, whichever comes later.

A second withdrawal option is for a surviving spouse to transfer inherited IRA assets to a beneficiary distribution account (BDA). While the timing of the distributions will be based on the deceased spouse's age, the amount of MRDs will be based on the inheriting spouse's age and calculated each year based on factors in the IRS's Single Life Expectancy table.

If the inheriting spouse is older than 70 1/2 and the deceased spouse died before age 70 1/2, this option allows the inheriting spouse to postpone taking MRDs until the year the deceased spouse would have turned 70 1/2. That means more tax deferral and savings.

If the inheriting spouse is younger than 59 1/2 and needs to tap funds in the IRA, creating a beneficiary distribution account (BDA) will allow him or her to do so without incurring a 10% early withdrawal penalty. The inheritor also could take equal periodic payments using his or her life expectancy and that of a chosen beneficiary. But this option might require withdrawing more funds and paying more taxes than might be necessary to meet their capital needs.

One worthwhile note here, according to Miller: If a spouse was 70 1/2 or older and was still owed a MRD the year he or she died, the spouse-beneficiary must take that distribution based on the deceased spouse's schedule by December 31 of the year the IRA owner died. In addition, the funds must be distributed under the beneficiary's tax identification number.

When it comes to estate planning, whether your client transfers the money to his own IRA or a BDA, he will still be considered the owner of the IRA and can now direct how the funds are inherited by naming new primary and contingent beneficiaries. Another estate planning tactic worth mentioning: A spouse who doesn't need the assets can disclaim all or part of an inherited IRA, which will allow the proceeds to pass to the next generation of eligible beneficiaries. Children or even grandchildren can take MRDs based on their life expectancies, which would stretch the life of the IRA out for years or even decades.

Based on the IRS' Single Life Expectancy Table, a 30-year-old would be required to take an MRD of just $1,904 on an inherited IRA with a market value $100,000, or just $9,578 of a $500,000 IRA. By disclaiming an IRA's assets, the inheritor will have stretched out the IRA's tax-deferred benefits for the lifetime of their own heirs and possibly their heirs' heirs. But the IRA custodian must be willing. If it isn't, more advisors are recommending that clients change custodians and rename primary and contingent beneficiaries.

If your client chooses to disclaim the inherited IRA, he or she must do so within nine months of the IRA owner's death and before they've taken possession of the IRA assets.