You will pay taxes.

In a case that intertwines income tax and retirement planning, the Internal Revenue Service (IRS) has ruled that a surviving spouse who successfully asserts her statutory rights in their deceased spouse’s IRA will owe income tax on the proceeds—they may not be rolled over into another IRA. In the Private Letter Ruling, the couple lived in a community property state when the husband died, leaving three IRAs, all of which named his son as the sole beneficiary. The decedent’s widow filed a claim against the husband’s estate for her community property share, and the two sides reached a settlement awarding her a 50% interest. The court ordered the division and specifically ruled that the surviving spouse’s interest should be paid to an IRA that benefited her. She asked the Service for a ruling that the transfer be treated as a non-taxable event, but it rejected her request. Relying on I.R.C. Sec. 408, the Service concluded that rollovers from non-spousal IRAs are not permitted. In addition, any distribution to the surviving spouse from the son’s inherited IRA balances would be a distribution—to him—subjecting him to additional income tax, too.

--Private Letter Rul. 201623001

Observation: Although this case developed in a community property state, its outcome would likely be similar in a common law state. See generally, D. Markowitz, "IRS Issues Harsh Ruling Against Surviving Spouse Seeking to Roll Over Part of Son’s Inherited IRA," Trust & Estates 6-6-16.