What Happens to Your IRA When Your Spouse Inherits It? What Every Family Should Know

One of the most common estate planning setups we see at Arcadia is straightforward: you name your spouse as the primary beneficiary of your IRA, and you expect your children to eventually inherit whatever is left after your spouse passes.

It makes sense. It feels simple. And in most cases, it reflects exactly what families want.

What most families don't realize is that the way your surviving spouse handles the inherited IRA — a decision they'll make after you're gone — can significantly affect how long your children have to take distributions, how much of the account gets eroded by taxes, and how long those assets continue growing tax-deferred.

These aren't small differences. For large IRAs, the financial impact can run into six or even seven figures.

Here's what you and your spouse need to understand before that decision ever has to be made.

First: Your Spouse Must Name Your Children as Beneficiary

Before we get into the options, there's a critical reminder that gets overlooked more often than it should.

If your goal is for your children to ultimately inherit your IRA, your surviving spouse must formally name your children as their beneficiary — regardless of which option they choose below. This is not automatic. If your spouse inherits your IRA and never updates their beneficiary designations, the IRA custodian may apply its own default rules when your spouse passes. Those rules may have nothing to do with what your family intended.

This is one of the most important and most commonly missed steps in IRA planning. 

The Three Choices Your Spouse Will Face

When your spouse inherits your IRA, they generally have three options. Each produces meaningfully different outcomes for your children.

Option 1: Roll It Into Their Own IRA

Your spouse can move the inherited IRA into their own IRA, at which point the account is treated as if it always belonged to them.

This is often the most flexible option. Your spouse won't be required to take distributions until age 73 or 75, depending on when they were born. If they're younger than 59½ at the time of inheritance, rolling the funds into their own IRA means early withdrawals could trigger a 10% penalty — so timing matters.

What this means for your children: When your spouse eventually passes, your children will generally have 10 years to fully distribute the account. If your spouse died before their required minimum distribution (RMD) age, your children won't face mandatory annual withdrawals during that 10-year window — they can generally take money out on their own schedule. If your spouse died after their RMD age, annual distributions may be required throughout the 10 years, calculated based on each child's individual life expectancy.

One important note: this "death after RMD age" rule applies to Traditional IRAs only. Roth IRAs have no required minimum distributions during the owner's lifetime, so this complication doesn't usually apply.

The flexibility advantage: There's no deadline for making this election. Your spouse can move the inherited IRA into their own account at any time — which means the timing of that decision can be strategically managed with an advisor.

Option 2: Keep It as a Beneficiary IRA

Rather than rolling the account into their own IRA, your spouse can keep the assets in what's called a beneficiary IRA (often called an inherited IRA).

The distribution rules here are a bit more complex and depend on whether you passed before or after your own RMD age.

If you died before your RMD age, your spouse generally begins taking distributions in the year you would have reached RMD age, based on their own life expectancy.

If you died on or after your RMD age, your spouse must typically begin taking distributions the year after your death, based on the longer of their remaining life expectancy or yours.

What this means for your children: When your spouse passes, your children continue taking distributions using your spouse's remaining life expectancy — and the account must be fully distributed no later than 10 years after your spouse's death. Here's the important nuance: if your spouse's remaining life expectancy at the time of their death is less than 10 years, the account could be depleted faster than families often anticipate. For large IRA balances, this can create a significant tax burden for your children in a compressed window.

Example: If Mark passes at age 78 and his wife Lisa keeps the IRA as a beneficiary IRA, she must begin annual distributions the following year based on the longer of her or Mark's remaining life expectancy. When Lisa later passes, their children must continue those annual distributions and fully distribute the account within 10 years of Lisa's death — potentially much sooner than 10 years if Lisa's life expectancy was short at that point.

Option 3: Disclaim the IRA Entirely

In some situations — typically for tax or estate planning reasons — your spouse may choose not to accept the inherited IRA at all. This is called a disclaimer, and it causes the IRA to pass directly to your children as if your spouse had predeceased you.

Your children would then inherit the IRA directly and have 10 years to distribute it. If you died before your RMD age, no annual distributions are required during that period. If you died on or after your RMD age, annual distributions would apply.

This option requires careful planning in advance. For a disclaimer to work the way you intend — meaning your children actually receive the assets — your beneficiary designation must be specifically structured to produce that outcome. This is not something to figure out after the fact. If you're considering building a disclaimer strategy into your estate plan, work with your estate planning attorney now, while you're alive, to make sure the beneficiary designations, IRA custodian requirements, and applicable state laws are all aligned.

Why This Conversation Needs to Happen While You're Both Alive

The decisions described above will ultimately be made by your surviving spouse — often while they're grieving, overwhelmed, and under pressure from well-meaning family members.

The best thing you can do right now is have this conversation while both of you are here. Make sure your spouse understands the options. Make sure they know who to call. Make sure they understand that the choice they make in the months after your death could shape your children's financial outcomes for a decade or more.

The Bottom Line

For most families, retirement accounts are among the largest assets they'll pass on to loved ones. The rules governing how those assets transfer — and how long your children have to take distributions — are complex, and the choices your spouse makes can have lasting consequences.

Disclosure: This article is for informational purposes only and does not constitute personalized tax, legal, or investment advice. Tax rules are subject to change. Please consult a qualified financial advisor and CPA for guidance specific to your situation. Arcadia Private Wealth LLC is a Registered Investment Adviser in the state of California. Advisory services are only offered to clients or prospective clients where we are properly registered or exempt from registration.