Can You Roll Over an Inherited IRA?

So you’ve inherited an IRA … what now?

First, do not do anything rash, such as rushing to cash out this financial “windfall.” That will most certainly result in huge tax consequences, no matter what your status as the beneficiary.

The smart thing to do is consult a financial planner or adviser who can help you assess your options and make the best decision to meet your own specific needs and goals.

Rules Vary for Spouse, Non-Spouse Beneficiary

IRS rules vary, depending on whether you have inherited the IRA from a spouse, or whether you are a non-spouse beneficiary.

For instance, among the questions I receive from clients and potential clients is whether they can roll over their inherited IRA. The answer is yes, if you inherited it from your spouse; but no, if you are a non-spouse beneficiary.

Here is an excerpt from IRS Publication 590A, explaining the available options to those two groups:

Inherited from Spouse

If you inherit a traditional IRA from your spouse, you generally have the following three choices. You can:

1. Treat it as your own IRA by designating yourself as the account owner.
2. Treat it as your own by rolling it over into your IRA, or to the extent it is taxable, into a:

• Qualified employer plan,
• Qualified employee annuity plan (section 403(a) plan),
• Tax-sheltered annuity plan (section 403(b) plan),
• Deferred compensation plan of a state or local government (section 457 plan), or

3. Treat yourself as the beneficiary rather than treating the IRA as your own.

You will be considered to have chosen to treat the IRA as your own if:

• Contributions (including rollover contributions) are made to the inherited IRA, or
• You do not take the required minimum distribution for a year as a beneficiary of the IRA.

You will only be considered to have chosen to treat the IRA as your own if:

• You are the sole beneficiary of the IRA, and
• You have an unlimited right to withdraw amounts from it.

However, if you receive a distribution from your deceased spouse’s IRA, you can roll that distribution over into your own IRA within the 60-day time limit, as long as the distribution is not a required distribution, even if you are not the sole beneficiary of your deceased spouse’s IRA. For more information, see When Must You Withdraw Assets? (Required Minimum Distributions) in Pub. 590-B for more information on required minimum distributions.

Inherited from Someone Other Than Spouse

If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. This means that you cannot make any contributions to the IRA. It also means you cannot roll over any amounts into or out of the inherited IRA. However, you can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary. See Pub. 590-B for more information.

Like the original owner, you generally will not owe tax on the assets in the IRA until you receive distributions from it. You must begin receiving distributions from the IRA under the rules for distributions that apply to beneficiaries.

Another Option

And there is another option – although few people choose this one. If you deem the amount of the inherited IRA to be not worth your trouble or if you want your share to go to other beneficiaries, you can choose to disinherit it. Still, that does not free you from following strict legal requirements. And the decision is irrevocable.

As you can see, the rules are plentiful and not exactly simple, so it is highly advised that you seek the counsel of your trusted tax, legal or financial adviser. Whatever path you choose, be sure you weigh your decision carefully.

We will look at more of the specific aspects of this topic in upcoming blog posts.