Tennessee Insurance Practice Exam

What happens if the owner of an IRA names their spouse as beneficiary but dies before any distributions are made?

1. The account is closed automatically

2. The funds are taxed heavily

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

4. The spouse must cash out the account

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

When an IRA owner names their spouse as the beneficiary and subsequently passes away before any distributions have been made, the funds in the IRA can indeed be rolled into the surviving spouse's IRA. This is a significant benefit because it allows the surviving spouse to manage the inherited funds as part of their own retirement planning. Rolling the funds over into their own IRA means that the surviving spouse can continue to defer taxes on the account's growth until they begin taking distributions. This option not only helps maintain the tax-deferred status of the inherited funds but also provides flexibility in how and when the spouse can withdraw the money, allowing for better financial planning and potentially greater accumulation of retirement funds. In contrast, other options, such as closing the account automatically, heavy taxation, or requiring the spouse to cash out, do not accurately reflect the benefits of this specific situation. The ability to roll over the inherited IRA into the surviving spouse’s own IRA is a crucial aspect of tax-efficient estate planning within retirement accounts.