Can a Non-Spouse Beneficiary Rollover an IRA?

IRAs offer tax advantages for retirement savings. When an IRA owner passes away, assets are typically transferred to designated beneficiaries. While a surviving spouse often treats an inherited IRA as their own, non-spouse beneficiaries face distinct and more complex rules. A direct “rollover” into a personal IRA is generally not an option; instead, specific rules govern the transfer and distribution of funds to an “inherited IRA” account.

Understanding Inherited IRAs for Non-Spouses

An inherited IRA is a specialized account for non-spouse beneficiaries, established to receive funds from a deceased IRA owner. It must be specifically titled to reflect its inherited nature, such as “Deceased Owner’s Name FBO (For Benefit Of) Beneficiary’s Name” or “Inherited IRA for the Benefit of [Beneficiary’s Name]”. This titling signifies that while the beneficiary controls the account, they cannot make new contributions.

The distinction between different types of non-spouse beneficiaries is important because it dictates the applicable distribution rules. The SECURE Act of 2019 introduced categories such as “eligible designated beneficiaries” (EDBs) and “non-eligible designated beneficiaries” (NEDBs). Eligible designated beneficiaries include minor children of the original account holder, individuals who are chronically ill or permanently disabled, and individuals not more than 10 years younger than the deceased IRA owner. Most other non-spouse beneficiaries fall under the non-eligible designated beneficiary category.

Distribution Rules for Non-Spouse Beneficiaries

The rules governing how and when non-spouse beneficiaries must withdraw funds from an inherited IRA largely depend on their beneficiary classification and the date of the original IRA owner’s death. For most non-eligible designated beneficiaries who inherit an IRA from an owner who died in 2020 or later, the primary rule is the 10-year rule. This rule mandates that the entire balance of the inherited IRA must be distributed by December 31st of the tenth year following the original IRA owner’s death. If the original account owner was already taking RMDs at death, the non-eligible designated beneficiary must continue annual RMDs in years one through nine, with the entire balance distributed by the end of the tenth year.

Exceptions to the 10-year rule apply to eligible designated beneficiaries. These individuals can “stretch” distributions over their own life expectancy, allowing for smaller annual RMDs and potentially extending tax-deferred growth. For example, a minor child can take distributions based on their life expectancy until age 21, when the 10-year rule applies. Disabled or chronically ill beneficiaries can stretch distributions over their lifetime.

While beneficiaries have flexibility to take distributions at any point, a lump-sum distribution is always an option. However, taking the entire balance at once can have significant immediate tax implications. The full amount may be added to the beneficiary’s taxable income for that year, potentially pushing them into a higher income tax bracket.

Steps to Establish an Inherited IRA

Establishing an inherited IRA involves specific procedural actions to ensure the funds are properly transferred and titled. The initial step for a non-spouse beneficiary is to gather necessary documentation. This includes a certified copy of the deceased IRA owner’s death certificate, information about the deceased’s IRA account, and the beneficiary’s own identification, including their Social Security Number. If the deceased had a will or trust, a copy may also be required by the financial institution.

Once the required information is assembled, the beneficiary should contact the financial institution that held the deceased’s IRA. This institution will provide specific forms and guide the beneficiary through their process for establishing an inherited IRA. The beneficiary will need to complete an inherited IRA application, ensuring the account is correctly titled. This distinct titling is essential for compliance and to avoid adverse tax consequences.

The transfer of funds from the deceased’s IRA to the newly established inherited IRA is typically done as a direct trustee-to-trustee transfer. This method ensures funds move directly between financial institutions without the beneficiary taking physical possession, which could trigger an immediate taxable distribution. After submitting the completed forms and documentation, the financial institution will process the request, transfer the assets, and notify the beneficiary once the inherited IRA is established and funded.

Tax Considerations for Inherited IRAs

Distributions from an inherited traditional IRA are taxable as ordinary income to the non-spouse beneficiary in the year they are received. This means the amount withdrawn is added to the beneficiary’s other income, potentially increasing their overall tax liability. Financial institutions will issue Form 1099-R to the beneficiary, reporting the total distribution and the taxable portion. Box 2a on Form 1099-R indicates the taxable amount, and a distribution code of “4” in Box 7 signifies a distribution due to death for tax reporting.

Distributions from inherited IRAs are exempt from the 10% early withdrawal penalty, regardless of the beneficiary’s age. This exception applies because the distribution is due to the death of the original account owner, not an early withdrawal from the beneficiary’s own retirement account. This allows beneficiaries under age 59½ to access funds without this additional penalty, although federal and state income taxes still apply.

For inherited Roth IRAs, distributions are tax-free, provided the original Roth IRA had been open for at least five years before the owner’s death. If the five-year rule has not been met, only the earnings portion of the distribution may be taxable, but contributions remain tax-free. Even with an inherited Roth IRA, the 10-year distribution rule applies for non-spouse beneficiaries, meaning the account must be emptied by the end of the tenth year following the original owner’s death. The specific tax outcome for any inherited IRA depends on the type of IRA, the beneficiary’s chosen distribution method, and the timing of withdrawals.