A spousal IRA heir gets a lot of flexibility in deciding what to do with the account. Thinkstock By Rachel L. Sheedy, Editor From Kiplinger's Retirement Report, April 2014 A spouse who inherits an IRA has a choice. The surviving spouse can move the account into an inherited IRA to keep the tax shelter. Or she can choose to roll the account into her own IRA.See Also: IRA Heirs Beware Mistakes The decision typically hinges on whether the surviving spouse has turned 59 1/2 and whether her spouse had turned 70 1/2 before he died. "Based on those two dates, it tells you what to do with the account," says Jeffrey Levine, IRA technical consultant for Ed Slott and Co., which provides IRA advice. A spouse who is younger than 59 1/2 and needs the money would be better off remaining a named beneficiary. If she rolls the money into her IRA and then withdraws any of it, she'll pay a 10% penalty until 59 1/2. Instead, if she remains a named beneficiary, she can tap the account without penalty. To be a named beneficiary, she must retitle the account as an inherited IRA. But "she's not locked into that option," says Denise Appleby, of Appleby Retirement Consulting, in Grayson, Ga. At any time, she can roll the money to her own account. Advertisement A surviving spouse who is younger than 70 1/2 and doesn't need the money generally should make the IRA her own. She won't be required to take minimum distributions until she turns 70 1/2. "All the rules apply as if she owned it since day one," says Ken Moraif, a certified financial planner at Money Matters, in Plano, Tex. Say a 74-year-old husband dies and passes his $500,000 IRA to his 64-year-old wife. If she takes it as her own, she can wait six years to take distributions. At 74, his required minimum distribution would have been about $21,000, according to Charles Schwab's Beneficiary RMD Calculator (www.schwab.com/benermdcalc). When she turns 70 1/2, her first RMD will be about $25,000, and the account will have climbed to nearly $700,000 (assuming a 6% annual growth rate). The age of the account owner at death also could influence a surviving spouse's decision. If the owner died before the date she was required to begin distributions, a spouse who remains a named beneficiary will not have to take distributions until the year that his late spouse would have turned 70 1/2. (The "required beginning date" for taking distributions is April 1 of the year after the owner turns 70 1/2.) Assume a 64-year-old wife leaves a traditional IRA worth about $530,000 to her 74-year-old husband, and he keeps it as an inherited IRA. Six years later, when his wife would have turned 70 1/2, he takes his first RMD of about $70,000, based on his own life expectancy. At 90, he would have about $300,000 in the account. Advertisement If instead he takes the account as his own, he will take his first distribution at age 75. He'll have to withdraw about $23,000. Although he has to start distributions much sooner, the RMDs are smaller and the account will last longer (assuming a 6% annual return). At age 90, he would still have about $512,000. If a late spouse had already started distributions, a survivor who stays a named beneficiary can use either her own life expectancy or her spouse's. If the survivor is older, she might choose the late spouse's because it would be the longer of the two life expectancies, Appleby says. A survivor's decision to roll the IRA into her own or keep it as an inherited IRA can have a big impact on the next generation. If the IRA becomes your own, your beneficiaries can use their own life expectancies to take distributions when they inherit the money. Your beneficiaries can also "stretch" distributions over their lifetimes if you kept the account as an inherited IRA but die before your deceased spouse would have turned 70 1/2, Levine says. But if you kept the account as an inherited IRA and you die after you start RMDs, your beneficiaries will have to take RMDs based on the life expectancy you were using. That means your younger beneficiaries will have lost the chance to stretch the IRA over their lifetimes.