How to Transfer an Inherited IRA

How to Transfer an Inherited IRA

How to Transfer an Inherited IRA

Inheriting an IRA is unlike inheriting other types of assets. The IRS has strict rules on how beneficiaries must treat such inherited accounts, and much depends on whether you inherited the IRA from your spouse or another person. If a transfer isn’t done correctly, a non-spouse could end up paying taxes on the entire amount at once because it is considered a distribution. That’s why it’s crucial to ensure that the proper procedure is followed by consulting with an estate attorney or a representative from the financial institution to which you are transferring the inherited IRA.

Spousal Inheritance

If you inherit your spouse’s IRA, you can treat it as your own and designate yourself as the account owner, or you can roll it over into your own IRA account or other qualified retirement plan, such as a 401(k). The IRS treats this transfer and subsequent distributions as if the account had always belonged to you. No other beneficiary is able to transfer an inherited IRA in this manner, but a spouse may also choose to open an inherited IRA account.

Non-Spousal Inheritance

If you inherit an IRA from anyone else, even a parent, your options are more limited. You must transfer the IRA into an inherited, or beneficiary, IRA account via a trustee-to-trustee transfer. That means assets go directly from one IRA account to another. This account is titled in the name of the deceased with your name as the beneficiary, such as John Smith, deceased, for the benefit of Mary Jones.

Inherited Traditional IRA vs. Roth IRA

Non-spousal IRA beneficiaries must generally take distributions by December 31 of the calendar year following that in which the original owner died. You must pay taxes on distributions from traditional IRAs, but that is not generally the case with Roth IRAs. The taxable exception with a Roth IRA occurs if you take distributions prior to turning age 59½ or if the original account holder established the Roth IRA less than five years before his demise. While taxes may apply for early distributions from inherited IRAs, the 10 percent early distribution penalty does not.

Required Minimum Distributions

For traditional, non-spousal inherited IRAs, you must take required minimum distributions as set forth by the IRS based on your age and life expectancy. If the original account owner died before having reached age 70½, you can opt for the five-year rule and withdraw the entire amount by December 31 of the fifth year following the original owner’s death. If the original owner had reached age 70½, you may calculate the required minimum distributions by using either your own age or the age of the deceased person. This makes sense if the original account owner was younger than the beneficiary.

Tip

  • You don't need to report the transfer on your income tax return because only rollovers and distributions require reporting.

Warning

  • You cannot transfer the funds from an inherited IRA into your own IRA. Instead, the funds must be kept separate because you are responsible for taking required distributions from the account.

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About the Author

A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.