Can You Combine Inherited IRAs?

Inheriting an Individual Retirement Account (IRA) offers continued tax advantages. Beneficiaries often wonder if they can combine these inherited funds with other retirement accounts or consolidate multiple inherited IRAs. The rules for inherited IRAs are specific and differ based on the beneficiary’s relationship to the deceased account owner, distinguishing between spouses and non-spousal beneficiaries. Understanding these distinctions is crucial for proper management.

Rules for Inherited IRA Management

An inherited IRA is a retirement account for individuals who receive assets from a deceased IRA owner or workplace savings plan. A fundamental distinction in managing an inherited IRA is whether the beneficiary is a surviving spouse or a non-spousal individual. This relationship dictates the options for handling the inherited funds and their distribution.

For non-spousal beneficiaries, such as children or friends, an inherited IRA cannot be combined with their personal IRA or other existing retirement accounts. The Internal Revenue Service (IRS) mandates that an inherited IRA retains its “inherited” status, operating under separate rules due to different tax treatments and distribution requirements. Non-spousal beneficiaries cannot make new contributions to an inherited IRA, nor can they convert it to a Roth IRA.

Most non-spousal beneficiaries are subject to the 10-year rule, requiring the entire balance of the inherited IRA to be distributed by December 31 of the tenth year following the original owner’s death. The account must be emptied by this deadline. Failure to adhere to these distribution rules can result in significant penalties, potentially as high as 25% of the amount.

Consolidating Multiple Inherited IRAs

A specific scenario where combining inherited IRA assets is permissible occurs when a single beneficiary inherits multiple IRA accounts from the same deceased individual. For instance, if an individual inherits two separate traditional IRAs from their parent, these two inherited accounts can be combined into one single inherited IRA account. This consolidation can offer administrative convenience, simplifying management by reducing the number of accounts to oversee.

The process for achieving this consolidation typically involves a trustee-to-trustee transfer. This method ensures the funds move directly between financial institutions without the beneficiary ever taking possession of the money. A direct transfer helps to maintain the tax-deferred status of the inherited assets and avoids any potential taxable distributions or penalties that could arise from an indirect rollover. When consolidating, the newly combined account must still be titled correctly, indicating it is an inherited IRA for the benefit of the beneficiary.

It is crucial to understand that while inherited IRAs from the same decedent can be combined, this consolidated account retains its inherited status. It cannot be merged with the beneficiary’s personal IRA or other individual retirement savings. The distinct rules governing inherited IRAs, such as the 10-year distribution period for many non-spousal beneficiaries, continue to apply to the consolidated inherited account. Attempting to combine inherited IRAs from different deceased individuals is not permitted, as each inherited IRA maintains a separate identity tied to its original owner. Adhering to these specific guidelines is important to ensure compliance with IRS regulations and to preserve the tax-advantaged nature of the inherited funds.

Spousal Rollover and Transfer Options

Surviving spouses are afforded unique and more flexible options when inheriting an IRA, setting them apart from non-spousal beneficiaries. A spouse is generally the only beneficiary who can treat an inherited IRA as their own, effectively rolling it over into their existing personal IRA or another qualified retirement plan. This flexibility allows the surviving spouse to continue the tax-deferred growth of the funds and manage them under their own retirement planning rules, including setting their own beneficiary designations.

One common approach is a direct rollover, also known as a trustee-to-trustee transfer. In this method, the funds are moved directly from the deceased spouse’s IRA to the surviving spouse’s existing IRA or a newly established IRA in the surviving spouse’s name. This is often the simplest and most recommended approach, as it avoids the potential for accidental taxable distributions. The transfer is not considered a taxable event, and the funds remain tax-deferred.

Another option available to spouses is an indirect rollover, which involves the surviving spouse receiving a distribution from the inherited IRA and then redepositing those funds into their own IRA within 60 days. While this option provides temporary access to the funds, it carries risks. If the funds are not redeposited within the 60-day window, the entire distribution becomes taxable income, potentially subject to income tax and, if the spouse is under age 59½, a 10% early withdrawal penalty. Furthermore, IRS rules limit indirect rollovers to one per 365-day period across all IRAs owned by an individual.

A spouse can also simply treat the inherited IRA as their own, without formally rolling it over to a different account. This option is available if the spouse is the sole beneficiary and has unlimited right to withdraw amounts. When a spouse treats the inherited IRA as their own, they can delay required minimum distributions (RMDs) until they reach their own RMD age, which is currently age 73 for traditional IRAs. This contrasts with non-spousal beneficiaries who often face earlier distribution deadlines. This spousal privilege provides substantial control over the timing of distributions and continued tax-advantaged growth, aligning the inherited assets with the surviving spouse’s long-term financial strategy.