#113 - Inherited IRA Options Every Widow Should Understand

Eric Blake: Sometimes rolling an account into your own IRA is exactly the right answer. Sometimes maintaining an inherited IRA for some period of time, at least, may provide valuable flexibility. The mistake isn't necessarily making a wrong choice. The mistake is not realizing you had a choice at all.

Welcome to another episode of the Simply Retirement Podcast, where we want to educate and empower women to live your retirement on your terms. I'm your host, Eric Blake, practicing retirement planner for over 25 years, founder of Blake Wealth Management, and I would not be the man I am today without the women in my life.

Wendy McConnell: I'm good. How are you?

Eric Blake: I'm doing very well. So, I'm counting down the days. I am just over a week from our big trip, our grand European riverboat cruise.

Wendy McConnell: Just a week.

Eric Blake: Just trying to get everything wrapped up, tie up all the loose ends, all that fun stuff. So we're very excited, but as always, there's a lot to get done before then.

Wendy McConnell: Where are you catching the boat from?

Eric Blake: So we go from Budapest up to Amsterdam.

Wendy McConnell: Okay.

Eric Blake: We actually get to Budapest on the 8th. The boat leaves on the 10th, so we've got about a two-day buffer there just to hang out and see what's there in Budapest.

Wendy McConnell: Okay.

Eric Blake: Then we're good to go. I'm excited.

Wendy McConnell: I am very excited for you. I'm sure it's going to be an amazing trip.

Eric Blake: I think so. It was actually recommended by a client who has done it a couple of times, and it's our 30th anniversary, so we've got that on top of everything. We're definitely excited. We're not going to be able to see the grandbaby. She's actually here with us right now.

Wendy McConnell: Okay.

Eric Blake: That's going to be interesting to see if we're able to FaceTime from Europe.

Wendy McConnell: Yeah. Well, I'm sure you can do it. I hope you have the time of your life.

Eric Blake: I'm extremely excited. It's going to be fun. It's a little overwhelming to think about because it's the first time we've been away from the business this long. The good thing is I've got my son and my daughter on board now, so they'll be able to keep the ship afloat.

Wendy McConnell: Pick up the slack. Yep.

Eric Blake: Yeah, it's going to be fun.

Wendy McConnell: Well, I can't wait to hear all about it.

Eric Blake: Absolutely. Maybe we'll do an episode just on that. Today, though, I do want to spend some time talking about what I think is one of the most important financial decisions many widows will face after losing a spouse, and that is what to do when you're inheriting an IRA or even a 401(k), and how that decision fits into the bigger picture of retirement planning.

Over the years, I've noticed something very interesting. Most widows understand that losing a spouse changes their finances. That's obvious. But what many don't realize is that one of the first financial decisions you have to make after that loss could affect your taxes, your income planning, your healthcare costs, your retirement options, and even required distributions down the road.

By the end of today's episode, what I really want to do is help make sure our audience understands, first, that you have options that others don't have. As a spouse inheriting a retirement account, you have options that aren't available to everybody. The key is understanding that those options exist, what they are, and asking the right questions. That's really what I want to focus on today. As we wrap up, I'm going to share about five questions I think will be really helpful, as well as an additional resource.

Wendy McConnell: Okay.

Eric Blake: As always, for all the links and resources, you can visit the Simply Retirement Podcast website.

I want to share why I think this topic matters. We work with a number of widows, and when someone loses a spouse, there are dozens of decisions to be made. Some are emotional, some are legal, some are practical, and some have financial consequences that may last for years. One of those decisions often involves a retirement account. It may be a traditional IRA. It may be a 401(k). Besides the house, in many cases, that is the largest financial asset left behind.

For many of the women we work with, the IRA is the largest asset. It's often worth more than the house itself. That's why the decisions surrounding the account can have such a significant impact on retirement income, taxes, healthcare, and long-term financial security.

Many people just assume the next step is simple. They think, "I'll just roll my husband's IRA into my own IRA and move on." But that may not always be the best answer. Today's episode connects directly to Episode 66, where we talked about the widow's penalty.

Back on Episode 66, we discussed how surviving spouses can end up paying more in taxes on less income. We talked about how tax brackets become less favorable, how a surviving spouse eventually moves from married filing jointly to single filing status, and how required minimum distributions can become a larger issue later in retirement.

Wendy McConnell: Okay.

Eric Blake: We also discussed how the same amount of income that fits comfortably on a joint return may place you in a much higher tax bracket when you're filing single because those tax brackets are roughly half the size.

Here's something else that surprises a lot of people. According to the U.S. Census Bureau, the median age at widowhood is approximately 59½. If that age sounds familiar, it's also the age when you can generally access retirement accounts without the early withdrawal penalty. If that's the median, that means half of widows become widows before that age.

Wendy McConnell:Right.

Eric Blake: Some are only a few years younger. Some are much younger. So what happens if you become a widow at 58, 55, or even 52, and that retirement account is your largest asset and potentially your biggest source of income? That's where it becomes so important to understand your options.

At those younger ages, you're also thinking about healthcare. You're not eligible for Medicare yet. Where is your income going to come from? If this is your largest asset, how do you manage it most effectively? For many widows, that retirement account isn't just another investment account. It may be their primary source of future income.

I'll share a quick story about a client. When her husband passed away, she was 58. He was 62, had just retired, had just started Social Security, and unfortunately passed away only a few months later. She wasn't eligible for survivor benefits yet. Their largest asset was his 401(k), which was still with his previous employer. She had no sustainable income and no health insurance.

Wendy McConnell: Ugh, that's terrible.

Eric Blake: That's why understanding your options is so important.

Wendy McConnell: Okay.

Eric Blake: In her case, having an advisor who understood these rules made a big difference. Unfortunately, a lot of advisors don't necessarily know these rules either. Many would simply say, "Let's roll your 401(k) into an IRA." That may be easier, but it isn't always the best option. The goal should be helping the surviving spouse understand all of the available choices.

When you inherit an account, many people assume everyone follows the same rules. That's simply not true. Surviving spouses receive special treatment, and they should.

Wendy McConnell: You would think.

Eric Blake: When a spouse inherits a retirement account, there are generally two primary options. The first is to maintain the account as an inherited IRA. The second is to roll the account into your own IRA.

Wendy McConnell: Hmm.

Eric Blake: At first glance, those options may seem very similar. The money is still invested. The account is still there. The investments may not even change. But the rules surrounding those accounts can be very different. Distribution rules can change. Required minimum distribution rules can change. Most importantly, the planning opportunities available to the surviving spouse can change.

You don't want to confuse simplicity with strategy. The simplest answer is not always the best answer. The right answer depends on your age, your income needs, your healthcare situation, your tax picture, your retirement goals, and how those goals may have changed after losing a spouse.

We often talk about the retirement income puzzle. Losing a spouse is like dumping that puzzle onto the floor. Now you have to start putting the pieces back together into what retirement looks like going forward.

Wendy McConnell: Like you said, she needed income.

Eric Blake: Mm-hmm.

Wendy McConnell: If she rolls it into her own IRA, she still has to follow the age requirements.

Eric Blake: Exactly.

Wendy McConnell: Right.

Eric Blake: That's why understanding these options is so critical. In her case, she actually could have left the money in his 401(k) and accessed it before age 59½. The challenge was that distributions from the employer plan had mandatory 20% federal tax withholding. That limits flexibility, especially when you have little or no other income.

Instead, we rolled the money into an inherited IRA. That gave her immediate access to the funds without the mandatory 20% withholding. The withdrawals were still taxable, but she could choose whether taxes would be withheld and, if so, how much.

Wendy McConnell: Okay.

Eric Blake: Another part of this decision involves required minimum distributions. Depending on your age, your spouse's age, and whether you keep the account as an inherited IRA or roll it into your own IRA, future RMDs may be handled differently.

Wendy McConnell: Okay. So the age is 73?

Eric Blake: Let's recap. Years ago it was 70½. Then the SECURE Act made it 72. SECURE Act 2.0 changed it again. It's now age 73 for those born before 1960 and age 75 for those born in 1960 or later.

Wendy McConnell: Got it. Seventy-three or seventy-five.

Eric Blake: Right. That's where planning becomes important. If you're younger than your spouse, you may not want your RMDs tied to your spouse's age. You may prefer to have them tied to your own age. On the other hand, if you're the older spouse and your younger spouse passes away, there may be situations where keeping them tied to the younger spouse's age is beneficial. These are relatively new planning opportunities, but if you don't know they exist, you can't choose them.

That's really what this episode is about. Understanding that there are options and looking at your specific situation before making a decision.

One of the goals of our widow's penalty episode was discussing what planning strategies could be implemented before a spouse passed away. Today we're talking about what happens after a spouse has already passed away. What decisions need to be made, and how do you make them?

Hey, everyone. It's Eric. I hope you're enjoying today's episode. I want to take just a quick moment to share a resource I think you'll find valuable.

Have you ever found yourself asking, "How much can I put into an IRA this year?" or "How much can I earn before my Social Security gets reduced?" Those are the kinds of questions that come up all the time, and the answers change, often more than you think.

That's why we created a free two-page Tax and Retirement Planning Cheat Sheet, updated for 2026, with the key tax, Social Security, and retirement numbers all in one place. You can download it at simplyretirementpodcast.com/retirementcheatsheet. It's a simple reference you can keep handy whenever questions come up.

Now, back to the episode.

Eric Blake: One other thing I see far too often is someone thinking, "I've got this large asset. Maybe I should pay off my mortgage or another major expense."

Wendy McConnell: Everybody wants to do it.

Eric Blake: They do, and it's natural to feel that way. There's nothing wrong with thinking that way. The question is whether acting on it changes your entire financial future.

We've talked about IRMAA before, the Income-Related Monthly Adjustment Amount for Medicare. If you take a huge distribution from your IRA after your spouse passes away, two years later you could be paying significantly higher Medicare premiums. If that money has already gone toward paying off the house, it's no longer available to help with your cash flow.

Wendy McConnell: Right.

Eric Blake: I think the biggest takeaway from this episode is flexibility. Understand that you have options. Step back. Look at what you have. Ask questions before making an informed decision.

Wendy McConnell: If my spouse died, I would probably feel more comfortable not having a mortgage payment every month.

Eric Blake: I understand that. A lot depends on your age and your overall situation. From a planning perspective, we always want to be proactive. If you're in your 40s or 50s, do you have an appropriate protection strategy? Do you have life insurance? Later in life, those questions may change, but you should still have a plan for how debt would be handled if something happened.

Too often people don't do that planning in advance. Then they're reacting emotionally after losing a spouse. If their largest asset is an IRA or 401(k), it's natural to think, "I'll just take out $500,000 and pay off the mortgage," without realizing that decision could trigger a huge tax bill, possible state income tax, higher Medicare premiums, and other consequences.

Wendy McConnell: Okay.

Eric Blake: In our client's case, she had been out of the workforce for about 20 years. The 401(k) was essentially her only source of income. We had to determine how to use that account in the most effective way because she still had a mortgage and needed to keep her financial life on track.

Wendy McConnell: Right.

Eric Blake: She also wasn't eligible for Medicare yet, and one of her biggest concerns was health insurance. We managed her income carefully using the inherited IRA so she could qualify for Affordable Care Act tax credits while keeping her taxable income within the appropriate range.

Had she immediately rolled everything into her own IRA, she could have faced a 10% early withdrawal penalty simply because she didn't know the inherited IRA strategy was available.

As we wrap up, here are the five questions I would ask if you're inheriting a spouse's IRA.

First, do I need income from this account before age 59½?

Wendy McConnell: Good question.

Eric Blake: Second, how will withdrawals affect my taxes?

Third, how will withdrawals affect my healthcare costs, both now and in the future?

Fourth, what resources are available to support me during this transition? Do I have cash reserves? Taxable investments? Will I need to return to work? When will survivor benefits be available?

Fifth, how will this decision affect future required minimum distributions? Could delaying RMDs or reducing future RMDs provide greater tax flexibility?

These are all important questions. You won't necessarily need every one of them, but they're a great place to start and can help you avoid making a permanent decision before understanding all of your options.

The goal of today's episode wasn't to turn you into an inherited IRA specialist. The goal was simply to help you understand that surviving spouses often have more options than they realize.

If you've recently lost a spouse, one of the biggest mistakes you can make is assuming the paperwork placed in front of you is your only path forward. Even the customer service representative at a large custodian may not know all of the available options. They may simply hand you paperwork to move the account into your own IRA, and you could lose valuable flexibility.

Sometimes rolling an account into your own IRA is exactly the right answer. Sometimes maintaining an inherited IRA for a period of time provides valuable flexibility. In our client's case, we used the inherited IRA for a couple of years while she needed access to the funds. Later, after she reached the appropriate age, we transferred the account into her own IRA so her RMDs would be based on her age rather than her husband's.

The key is understanding the trade-offs before making a permanent decision. The mistake isn't necessarily making the wrong choice. The mistake is not realizing you had a choice at all.

The inherited IRA was simply a strategy. The flexibility it provided created an income bridge during a period when she had very few other options. For other surviving spouses, the flexibility may involve better tax planning, retirement income planning, or RMD planning over many years.

Wendy McConnell: There are a lot of questions to consider, for sure.

Eric Blake: Exactly. I hope everyone takes away one simple message. Ask questions. Don't feel like you have to make an immediate decision. Sit down with someone who understands these rules. If someone immediately hands you paperwork to move the account into your own IRA, pause and ask what your other options might be.

Wendy McConnell: Yeah. Absolutely.

Eric Blake: Before making any major decision involving an inherited retirement account, especially one that can affect your taxes, healthcare costs, or retirement income, consider consulting with a qualified professional who can help you evaluate your options.

Wendy McConnell: Like I said, there are just so many questions. I'm just going to call my qualified representative.

Eric Blake: There you go. That's the first place to start.

Wendy McConnell: There's a lot to know, Eric.

Eric Blake: There is, but the objective isn't to become an expert. It's simply to know enough to ask the right questions. Those five questions will give you a good place to start, and from there it's about making an educated decision.

That is it for today's episode. As always, thank you for tuning in, and thank you to Wendy for joining me once again. If you're looking for a personalized retirement plan that helps you make smart decisions around income, investments, and taxes, you can visit getmysimplyretirementroadmap.com to schedule a call with our team.

For all the links and resources mentioned today, you can visit simplyretirementpodcast.com. Don't forget to like, follow, and share the show.

Until next time, please remember, retirement is not the end of the road. It's the start of a new journey.