Spousal Rollover

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on February 29, 2024

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Definition of Spousal Rollover

A spousal rollover is a process by which a surviving spouse can transfer the assets of their deceased spouse into their own accounts, ensuring that these assets can continue to grow tax-deferred and provide financial support.

This process is particularly important when dealing with retirement accounts, as it can help to simplify estate planning and provide flexibility in withdrawal options.

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Maximize your retirement benefits with a Spousal Rollover strategy. If you're a surviving spouse, you can transfer your deceased partner's IRA or employer-sponsored retirement plan into your own IRA. This move can offer tax-deferred growth and more flexible withdrawal options. Let's see how a spousal rollover can work for you.

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Purpose and Benefits of Spousal Rollover

The main purpose of a spousal rollover are to enable a surviving spouse to assume control of the deceased spouse's assets while maintaining their tax-deferred status. This can help to minimize tax liability, simplify estate planning, and provide financial security for the surviving spouse.

Eligibility for Spousal Rollover

In order to be eligible for a spousal rollover, the surviving spouse must be the sole beneficiary of the deceased spouse's account. Additionally, the account must be a qualified retirement or non-retirement accounts, such as an IRA, 401(k), annuity, or life insurance policy.

Types of Spousal Rollover

Types of Spousal Rollover

Retirement Accounts

Traditional IRA

A surviving spouse can roll over assets from a deceased spouse's traditional IRA into their own traditional IRA, allowing for continued tax-deferred growth and potential tax savings.

Roth IRA

A Roth IRA spousal rollover involves transferring the assets of a deceased spouse's Roth IRA into the surviving spouse's Roth IRA. This allows for continued tax-free growth and qualified tax-free withdrawals.

401(k)

Spousal rollovers can also apply to 401(k) accounts, enabling the surviving spouse to transfer the assets into their own 401(k) account or into a traditional IRA.

Non-retirement Accounts

Taxable Investment Accounts

While not tax-deferred, a spousal rollover can occur for taxable investment accounts, resulting in the transfer of assets from the deceased spouse's account to the surviving spouse's account.

Annuities

Spousal rollovers for annuities allow the surviving spouse to assume ownership of the annuity contract and maintain the tax-deferred status of the assets.

Life Insurance Policies

A spousal rollover for a life insurance policy enables the surviving spouse to take over the policy and receive the death benefit without incurring taxes.

Spousal Rollover Process

Timeframe for Rollover

It is essential for the surviving spouse to initiate the spousal rollover process within the designated timeframe, which may vary depending on the type of account and financial institution involved.

Steps to Initiate a Spousal Rollover

Contact Financial Institution

The first step in initiating a spousal rollover is to contact the financial institution holding the deceased spouse's account.

Provide Necessary Documentation

The surviving spouse will need to provide the financial institution with the necessary documentation, including a death certificate and proof of beneficiary status.

Select New Account Type and Beneficiaries

The surviving spouse will need to decide on the type of account for the rollover and designate new beneficiaries for the account.

Tax Implications and Considerations

Tax-Deferred Status

Spousal rollovers help maintain the tax-deferred status of the assets, potentially minimizing tax liability for the surviving spouse.

Required Minimum Distributions (RMDs)

For certain types of accounts, such as traditional IRAs and 401(k)s, the surviving spouse may be subject to Required Minimum Distributions (RMDs) once they reach a certain age.

Early Withdrawal Penalties

If the surviving spouse withdraws funds from the account before reaching the age of 59 ½, they may be subject to early withdrawal penalties, depending on the type of account.

Pros and Cons of Spousal Rollover

Pros and Cons of Spousal Rollover

Pros

Continuation of Tax-Deferred Growth

One of the main benefits of spousal rollovers is the ability to maintain the tax-deferred status of the assets, allowing for continued growth and potential tax savings.

Simplified Estate Planning

Spousal rollovers can help simplify estate planning by consolidating assets and reducing the complexity of managing multiple accounts.

Flexibility in Withdrawal Options

A spousal rollover can provide the surviving spouse with greater flexibility in withdrawal options, particularly when dealing with retirement accounts.

Cons

Potential Tax Liability

While spousal rollovers can offer tax benefits, the surviving spouse may still face potential tax liability when withdrawing funds, depending on the type of account.

Limited Investment Choices

In some cases, spousal rollovers may result in limited investment choices, particularly when transferring assets from a 401(k) to an IRA.

Complications for Non-spouse Beneficiaries

Spousal rollovers may complicate matters for non-spouse beneficiaries, who may face additional tax implications or restrictions when inheriting assets.

Alternative Strategies

Inheriting Assets Directly

Instead of opting for a spousal rollover, the surviving spouse may choose to inherit the assets directly. This option may be more suitable in certain situations, particularly when dealing with non-retirement accounts.

Disclaiming the Inheritance

In some cases, the surviving spouse may choose to disclaim the inheritance, allowing the assets to pass to the next beneficiary in line. This option may be beneficial for estate planning purposes or in situations where the surviving spouse does not need the assets.

Establishing a Trust

Another alternative to spousal rollovers is establishing a trust, which can provide a more flexible and customizable solution for managing inherited assets.

Legal and Regulatory Considerations

State Laws and Marital Property

State laws regarding marital property can influence the spousal rollover process, as certain states may have specific rules or restrictions in place.

IRS Rules and Regulations

The IRS provides guidelines and regulations surrounding spousal rollovers, which must be adhered to in order to maintain the tax-deferred status of the assets.

Financial Industry Regulatory Authority (FINRA) Guidelines

FINRA also provides guidelines for spousal rollovers, particularly in relation to the transfer of assets and the designation of beneficiaries.

Conclusion

Spousal rollovers play a critical role in estate planning, as they can help to simplify the process and ensure that assets are transferred efficiently and effectively to the surviving spouse.

Each individual's circumstances will differ, and it is essential to carefully assess one's own financial situation and needs when deciding whether a spousal rollover is the best option.

Due to the complexity of spousal rollovers and the various legal and regulatory considerations involved, it is highly recommended to consult with financial and legal professionals when navigating this process.

Spousal Rollover FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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