Among all the different types of retirement account beneficiaries, those who are the surviving spouse of the original account owner receive the most preferential tax treatment when it comes to distributing the account’s assets after the owner’s death. While non-spouse beneficiaries face strict timelines – either starting Required Minimum Distributions (RMDs) the year after the original owner’s death and stretching them over their remaining life expectancy (if they were considered Eligible Designated Beneficiaries), or fully distributing the account within 10 years (if they were Non-Eligible Designated Beneficiaries) or 5 years (if they were Non-Designated Beneficiaries) – surviving spouses have more flexibility. They can delay their RMDs until the original account owner would have reached the required age for starting RMDs if they were still alive.
Furthermore, surviving spouses also have the option to roll over the inherited account into an account in their own name, allowing the account to be treated as if it had always been theirs. Meaning that the surviving spouse can wait until their own RMD age to start distributing from the account; and when RMDs do begin, they’re able to use the more favorable Uniform Lifetime Table to calculate the RMD amounts (rather than the Single Life Table that’s generally used to calculate the RMDs of account beneficiaries).
Prior to 2024, however, spousal beneficiaries faced complex tradeoffs when deciding whether to leave the account as an inherited account or to roll it over into their own name. For example, a surviving spouse under age 59 1/2 may want to do a spousal rollover to take advantage of the more favorable distribution schedule; but if they need to access any of the funds in the account before age 59 1/2, withdrawing them from the rollover account would incur a 10% early distribution penalty (which they wouldn’t have incurred if they had left the account as inherited). And a surviving spouse who is older than the deceased spouse may want to leave the account as inherited in order to delay RMDs until the decedent’s RMD age, but then they’d be subject to the less-favorable distribution schedule using the Single Life Table.
But the SECURE 2.0 Act created a new option for surviving spouses (effective starting in 2024) that changes the calculus for deciding which option to choose from. The new rule allows spousal beneficiaries who leave the account in the decedent’s name to elect to use the Uniform Lifetime Table to calculate their RMDs rather than the Single Life Table as was required under the existing rules. Which means that spouses who choose to keep the account in the decedent’s name for any reason will no longer be forced to take higher RMDs for doing so.
Notably, there may still be reasons to complete a spousal rollover in spite of the new Spousal Election rule. For instance, surviving spouses who are younger than the decedent can delay RMDs for longer after rolling the account over; additionally, rollover accounts generally have more flexible and favorable options for the surviving spouse’s own beneficiaries (especially if the surviving spouse later remarries). Meaning that, in many cases, the best option might be to keep the account under the decedent’s name until RMDs begin and then roll it over into the spouse’s name thereafter.
The key point is that even though the new Spousal Election may seem to complicate the planning picture for surviving spouses by adding yet another option, it actually serves to benefit surviving spouses by reducing the tradeoffs between inherited account and spousal rollover options. And while different spousal beneficiaries may have a different ‘optimal’ choice depending on their own circumstances, the consequences of making the ‘wrong’ choice are now much less than they were under the old rules!
