Inherited IRA vs. Spousal IRA

A woman looking up differences between inherited and spousal IRAs.

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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:

Spousal IRAs allow a working spouse to contribute to an IRA for a non-working (or low-earning) spouse. These are used while both spouses are alive to help build retirement savings for the non-working spouse.
Inherited IRAs are for surviving spouses or beneficiaries after the account owner dies.

Spousal IRAs require that the couple file taxes jointly, and contributions are subject to annual IRA contribution limits.
Inherited IRAs arise after the death of the original account owner, with specific rules for distributions and required minimum distributions (RMDs), depending on whether the spouse treats the IRA as their own or as an inherited account.

Spousal IRAs allow contributions to continue as long as the working spouse has earned income and meets contribution limits.
Inherited IRAs do not permit new contributions; the account is for distributing inherited assets.

Spousal IRAs follow standard IRA rules for withdrawals, including penalties for early withdrawals before age 59½.
Inherited IRAs have different distribution rules based on whether the beneficiary is a spouse or non-spouse, including options to delay RMDs or take distributions over time.

Inheriting an IRA as a spouse can be a complex process. Here are four useful tips to help unpack your options:

Consider rolling over the IRA into your own. As a surviving spouse, you have an option to roll over the inherited IRA into your own IRA. This allows you to treat the funds as your own, potentially delaying required minimum distributions (RMDs) until you reach age 73. This option can be particularly beneficial if you are younger than your deceased spouse and want to allow the funds to continue growing tax-deferred. Surviving spouses may also keep funds as an inherited IRA and access the money immediately without early withdrawal penalties.
Understand the tax implications: Inherited IRAs come with specific tax rules that can impact your financial planning. Withdrawals from a traditional IRA are generally taxable as ordinary income, so it’s important to plan for potential tax liabilities. Consulting with a tax advisor can help you strategize withdrawals to minimize tax burdens.
Review your financial goals and needs: Before making any decisions, assess your current financial situation and long-term goals. Consider how the inherited IRA fits into your overall retirement plan and whether you need immediate access to the funds.
Seek professional financial advice: Navigating the complexities of an inherited IRA can be challenging. A financial advisor can provide personalized advice, helping you understand the implications of each option and ensuring that your decisions align with your financial objectives.

A woman rebalancing her retirement plan.

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

A financial advisor can help you determine when is the best time to claim Social Security and manage other factors to maximize your retirement. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you want to know how much your nest egg could grow over time, SmartAsset’s retirement calculator can help you get an estimate.

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