Can you roll over an inherited IRA?

If you inherited an IRA from a loved one, you should understand the rules that govern IRA inheritance. Inherited IRAs are subject to various IRS regulations, and making the wrong decision could result in taxes and penalties. Whether you inherited the IRA from a spouse, parent, or other relative, you should understand the options you have with the inherited assets.

If you inherited the IRA from a spouse, you will be allowed to roll over the inherited IRA into your traditional or Roth IRA. A rollover allows the surviving spouse to treat the inherited IRA as their own, and even name beneficiaries. However, non-spouse beneficiaries are not eligible to rollover the inherited IRA into their IRA but may have different options with the money.

Options when you inherit IRA from a spouse

When you inherit an IRA from your spouse, you will have more options with the inherited IRA than a non-spouse beneficiary. Here are the options you have:

Treat IRA as your own

When you inherit an IRA from your spouse, you can decide to treat the IRA as your own. You can achieve this by transferring the inherited IRA funds into an IRA in your name, and continue growing the retirement money. If you have an earned income and are below age 73, you can continue contributing to the IRA.

Since the IRA will be in your name, you won't be required to take Required Minimum Distributions (RMDs) even if your deceased spouse had reached the RMD age. You can defer taking RMDs until you reach the RMD age i.e. age 73.

Rollover IRA into existing IRA

A surviving spouse can also choose to roll over the inherited IRA into an existing IRA. If the spouse inherited a traditional IRA, you can roll over the IRA into your existing traditional IRA without triggering taxes. However, if you rollover the traditional IRA into a Roth IRA, you will be required to pay income taxes on the entire rollover amount at your tax bracket.

When requesting a rollover, you can request a direct rollover so that the inherited assets are transferred directly from one IRA custodian to another without getting your hands on the money. A direct rollover avoids triggering tax liabilities that could arise with an indirect rollover.

If you opt for an indirect rollover, you will receive a mailed check with the distribution, and you must deposit the funds into another IRA within 60 days. Waiting longer than 60 days to deposit the money could see the distribution taxed as income.

After completing the rollover, a surviving spouse gains full ownership of the inherited IRA funds and can name their beneficiaries according to their wishes. The spouse can designate a single beneficiary such as a child or grandchild, or multiple beneficiaries such as siblings, children, grandchildren, and even charity organizations.

Options when you inherit IRA from a non-spouse

If you inherited an IRA from another person other than your spouse, you won't be able to roll over the inherited IRA into your IRA. However, here are some options you may have with the money:

Open an inherited IRA

When you inherit an IRA from a non-spouse, you will be required to open an inherited IRA in the name of the deceased. The IRA must be labeled as an inherited IRA to ensure it complies with IRS requirements. The inherited IRA remains in the name of the decedent, but you are allowed to manage the money as a designated beneficiary.

When you open an inherited IRA, you won’t be able to make contributions to the IRA. Additionally, withdrawals from the inherited IRA are subject to the 10-year rule, and you will be required to deplete the account by the 10^th anniversary of the original IRA owner’s death, except in limited circumstances.

If you are an eligible designated beneficiary such as a minor child, disabled or chronically ill individual, or you are no more than 10 years younger than the original IRA owner, you may be able to spread distributions over your life expectancy.

Withdraw money from the IRA

If you have an urgent financial need, you can decide to withdraw money from the inherited IRA. However, any withdrawals will be subject to income taxes at your income tax bracket rate.

Withdrawals from an inherited IRA are subject to the 10-year rule, and you can choose to take a lump sum distribution or spread distributions over the 10 years. A lump sum distribution can push you to a higher tax bracket, resulting in higher tax liabilities. If you have a substantial amount in your inherited IRA, you can spread distributions over the 10 years to help you manage tax liabilities.

Additionally, if the original IRA holder had started taking RMDs, you must continue taking the minimum distributions annually until the account is fully distributed. Missing RMDs could result in up to a 25% penalty on the missed distribution.

Tax implications of IRA rollovers

When you inherit an IRA, there may be various tax implications depending on your relationship with the original IRA owner.

For spousal beneficiaries who choose to roll over the inherited IRA to their IRA, the money will continue growing tax-deferred until withdrawals are made. Additionally, rolling over the inherited IRA allows the surviving spouse to defer taking RMDs until they reach the RMD age, even if their deceased spouse had started taking RMDs.

Non-spouse beneficiaries are subject to the 10-year rule, and they will be required to empty the inherited IRA by the 10^th year. Any distributions taken will be subject to income taxes. However, these distributions are not subject to the 10% early withdrawal penalty, even if you are below age 59 ½.