“These funds are treated as if they were always in the living spouse’s IRA,” said Brenner. “If they’re under 70 and a half, they don’t have to take any distributions from their IRA, and that’s a good thing. The bad news is if they’re under 59 and a half and they do a spousal rollover, and if they take distributions, they’ll be hit with a 10 percent early distribution penalty.”

Once the surviving spouse elects to roll over the IRA assets, it’s an irrevocable decision. But there’s no deadline to take a spousal rollover. They could keep the account as an inherited IRA for as long as they like. Depending on the age difference between spouses, different IRS life expectancy tables may apply to determining minimum distributions from the account.

In the event that one spouse passes away at a young age, the surviving spouse may elect to keep the IRA in the deceased spouse’s name, which would allow them to delay taking required distributions until the deceased spouse would have been 70 and one half. This also works if there is a large age difference between spouses. 

Spousal beneficiaries also have the ability to recalculate their life expectancy on an annual basis, which may lead to a slightly smaller RMD over the long term, said Brenner.

Spousal beneficiaries, upon inheriting an IRA, should immediately name new beneficiaries to avoid having the account default to the estate upon their own death and going through the probate process. Doing so also preserves the stretch strategy for future beneficiaries.

Non-spouse Beneficiaries

Non-spouse beneficiaries can be children, grandchildren, siblings, parents, a trust, an estate or a charity, said Brenner. Only a living, breathing person named on a beneficiary form is eligible to use the stretch IRA strategy, with one exception—if a “see-through” trust is named as beneficiary.

Ed Slott & Co. recommends against using trusts as IRA beneficiaries as they often cause more complications and additional costs than they’re worth. The company lists 11 reasons that a trust might make an appropriate beneficiary:

  1. If the potential designated beneficiary is a minor, disabled, incompetent or unsophisticated
  2. To rpvoide an income stream
  3. To protect the family’s retirement assets in a second marriage situation
  4. To guarantee a lifetime payout to beneficiaries via a stretch IRA
  5. To avoid estate tax or inclusion in the beneficiary’s estate
  6. For generation skipping purposes
  7. To set up a continuation plan for distributions after the death of a beneficiary
  8. To control the disposition of large IRAs
  9. Creditor protection
  10. Divorce protection
  11. To fund charitable bequests via charitable remainder trusts

When a trust is named as an IRA beneficiary, the RMDs are calculated using the life expectancy of the eldest trust beneficiary.

To qualify as a see-through trust that can preserve the stretch IRA strategy, a trust must:

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