When you create an IRA or enroll in a 401(k) plan, the forms you fill out will ask you to name a beneficiary. You will probably also be given the opportunity to name an alternate (sometimes called a "secondary" or "contingent") beneficiary, who will inherit the money if your first choice dies before you do.
Most married couples name each other as beneficiaries—a good choice, because a surviving spouse who is the sole beneficiary has more flexibility about what to do with the money than do other beneficiaries. Unlike other beneficiaries, a surviving spouse, in some cases, can keep all the money tax-deferred at least for a while. (This isn't a concern with the Roth IRA, because withdrawals generally aren't taxed.)
A surviving spouse who is the sole beneficiary of a retirement account has two options: rolling over the account or leaving it as it is, as an "inherited IRA." For the most part, it doesn't matter whether the account owner died before or after reaching the age at which required minimum withdrawals (RMDs) must begin. There is, however, one significant exception: If the minimum withdrawals have become required, then the surviving spouse must make the withdrawal for the year of death. After that, the surviving spouse can exercise one of the following choices.
Spouses who are the sole beneficiaries of an IRA or qualified plan such as a 401(k) can roll over the money into their own retirement account. To do that, the spouse needs to contact the retirement account administrator and complete some paperwork.
Once the account has been rolled over, everything is just as if the surviving spouse were the original owner. The surviving spouse can now name a beneficiary to inherit the funds. Required minimum distributions will begin when the spouse reaches age 72, and the amount of the RMDs will be based on the surviving spouse's life expectancy as set out in IRS tables. (If the spouse remarries, required withdrawals will be based on the joint life expectancy of the survivor and the new spouse if the new spouse is more than ten years younger.)
The surviving spouse doesn't have to pay income tax on money in the account until it is withdrawn. Meanwhile, the funds can keep earning tax-deferred income.
The survivor can also roll an IRA or 401(k) into his or her own Roth IRA. Taxes will be due on the entire amount that is rolled over, however, so this would make financial sense only if the survivor expects to pay higher taxes later.
A spouse can also leave the retirement account in the deceased spouse's name as an "inherited IRA." The survivor must begin taking required distributions by the later of:
This option might make sense if the survivor is under age 59½ and expects to withdraw money from the account soon. Beneficiaries are not subject to the usual 10% "early distribution" penalty that applies when you withdraw money from the account before age 59½, but they lose that special exemption if they roll over the account. If circumstances change, the survivor can always roll over the account later.
It's generally a bad idea to name more than one beneficiary, for two reasons.
First, if you name your spouse and someone else as beneficiaries, your spouse loses the special benefits and flexibility she would otherwise have.
Second, it complicates things. Many non-spouse beneficiaries are subject to a ten-year rule imposed by the SECURE Act, which became effective starting in 2020. If, for example, you named your spouse and ten-year-old grandson as your beneficiaries, they would be subject to different withdrawal rules. In the event of multiple beneficiaries, the best practice is usually to split the inherited account into separate accounts, each owned by one of the beneficiaries, but not every retirement plan administrator allows this, and it creates complexities.
If you want to name someone other than your spouse as beneficiary, make sure you don't run afoul of state and federal laws designed to protect surviving spouses. If your spouse survives you but is not named as a beneficiary of your retirement account, your spouse might still have a legal claim to the account. For example, with a 401(k), your spouse is automatically the beneficiary of the account, even if someone else is named, unless your spouse signs a waiver. With IRAs, whether your spouse is entitled to inherit part of the account depends upon your state. (For more on your spouse and ex-spouse's claims to retirement accounts, see If You Don't Want to Leave Retirement Accounts to Your Spouse.)
When you name your spouse as primary beneficiary, you'll probably be able to name an alternate (or secondary or contingent) beneficiary—someone to inherit the money if your spouse doesn't survive you. Many people name their children as the alternates. Be sure to enter an alternate's name—if you don't, the money will likely pass through probate.
Naming an alternate beneficiary also gives your family more flexibility after your death. It's easy for a beneficiary to "disclaim" his or her inheritance—that is, to turn it down in favor of the alternate beneficiary. A surviving spouse who doesn't need the money could let it go to the children instead, possibly allowing withdrawals to be spread out over a longer period.