Rhode Island Life Insurance Practice Exam

If the owner of an IRA names their spouse as beneficiary but dies before any distributions are made, what happens to the account?

1. The account is taxed heavily

2. The account can be rolled into the surviving spouse's IRA

3. The account must be liquidated immediately

4. The account is forfeited

The correct answer is: The account can be rolled into the surviving spouse's IRA

When the owner of an IRA names their spouse as beneficiary and passes away before taking any distributions, the surviving spouse has the option to roll the inherited IRA into their own IRA. This rollover allows the surviving spouse to treat the inherited funds as their own, which can provide several advantages, including the ability to defer taxes on the earnings until they withdraw money from the account. This option is significant not only because it promotes tax efficiency, but it also grants the surviving spouse more control over the funds. They can continue to contribute to the IRA if they choose, subject to contribution limits, and they can manage the account according to their financial needs and goals. It's important to note that if the account were required to be liquidated immediately or forfeited, this would not provide any benefit to the surviving spouse, nor would it align with the long-term investment and tax-deferred growth aims of an IRA. Additionally, heavy taxation would generally only apply upon distribution of the funds, not upon their transfer to a surviving spouse's account in the case of an IRA inherited by a spouse.