Final answer:
A surviving spouse has four options for an inherited IRA: rollover into an existing IRA, set up a new IRA, take a lump sum, or take immediate distributions. Options 1 and 2 preserve the tax-deferred status, whereas Options 3 and 4 result in immediate taxation.
Step-by-step explanation:
When a surviving spouse inherits an Individual Retirement Account (IRA), there are several options for rolling over the funds. Option 1 is for the surviving spouse to roll over the inherited IRA into their own existing Traditional IRA. This method allows the continuation of the tax-deferred growth of the retirement assets until withdrawals are made, at which point they are subject to income tax.
Option 2 involves rolling the inherited IRA into a new IRA set up by the surviving spouse. This option also maintains the account's tax-deferred status. Option 3 enables the surviving spouse to take the proceeds as a lump sum. However, it's essential to be aware that taking the proceeds as a lump sum would subject the distribution to being taxed based on the current income tax rates. Finally, Option 4 allows for immediate distributions of the funds, these too would be taxed as income.
Based on the options provided, if one wants to continue the tax-deferred nature of the retirement assets, rolling over the proceeds into an existing or new IRA (Options 1 and 2) would be suitable. Conversely, Option 3 or 4 would not preserve the tax-deferred advantage as they would incur immediate tax liability.
In summary, the most tax-efficient options are to either roll over the IRA proceeds into an existing IRA owned by the surviving spouse or into a new IRA set up by the surviving spouse. The correct options for maintaining the tax-deferred growth are Options 1 and 2.