Can You Rollover Your Inherited IRA?

An inherited Individual Retirement Account (IRA) presents unique considerations for beneficiaries. Its management and distribution are governed by specific Internal Revenue Service (IRS) regulations, differing significantly from rules for personal IRAs. Understanding these distinctions is important for navigating the options available, particularly concerning rollovers. The rules vary based on the beneficiary’s relationship to the original account holder and the date of the original owner’s death.

Determining Your Beneficiary Status

Identifying your specific beneficiary status is the first step in understanding how to manage an inherited IRA. The IRS categorizes beneficiaries, each with distinct rules for managing and distributing inherited assets, including whether a rollover is permissible. Beneficiaries generally fall into categories such as spouses, non-spousal individuals, and non-individual entities like trusts or estates.

The rules for an inherited IRA depend entirely on this classification. A surviving spouse has more flexibility compared to a non-spousal individual. Certain non-spousal beneficiaries, termed “eligible designated beneficiaries,” also receive more favorable treatment. This determination impacts distribution timelines and tax implications.

Spousal Beneficiary Options

A surviving spouse who inherits an IRA has the most flexible options, allowing for continued tax-deferred growth. One primary choice is to roll over the inherited IRA into their own existing IRA or another eligible retirement plan. This allows the spouse to treat the inherited funds as their own, subject to their own contribution and distribution rules, including their required minimum distribution (RMD) age.

Alternatively, a spouse can elect to treat the inherited IRA as their own IRA without formally rolling it over, provided they are the sole beneficiary and have unlimited withdrawal rights. A spouse can also choose to keep the inherited IRA as a beneficiary account, subject to specific spousal RMD rules based on their own life expectancy or the deceased’s life expectancy, depending on when the original owner died. For detailed guidance, IRS Publication 590-B provides further information.

Non-Spousal Beneficiary Options

Rules for non-spousal beneficiaries changed with the SECURE Act of 2019, effective for deaths occurring in 2020 and later. Most non-spousal beneficiaries cannot roll over an inherited IRA into their own personal IRA. Instead, they must transfer assets into an inherited IRA, established in the deceased owner’s name for the heir.

For most non-spousal beneficiaries, the SECURE Act introduced the “10-year rule,” requiring the entire inherited IRA balance to be distributed by December 31 of the year containing the 10th anniversary of the original owner’s death. This rule applies whether the original owner died before or after their required beginning date for RMDs. If the original owner died on or after their required beginning date, the non-spousal beneficiary may also be required to take annual RMDs during the 10-year period.

Exceptions to the 10-year rule apply to “eligible designated beneficiaries” (EDBs), who can still stretch distributions over their life expectancy. These EDBs include surviving spouses, disabled or chronically ill individuals, minor children of the deceased account owner until they reach the age of majority, and individuals not more than 10 years younger than the deceased.

Completing a Rollover or Transfer

For those eligible to move inherited IRA funds, primarily spousal beneficiaries, the process involves specific steps. The most straightforward method is a direct trustee-to-trustee transfer. This involves the financial institution holding the inherited IRA directly sending funds to the new financial institution where the beneficiary’s own IRA is held. This transfer avoids the beneficiary taking physical possession of the funds, which helps prevent potential tax complications or penalties.

An indirect rollover, also known as a 60-day rollover, is another option available exclusively to spouses. The beneficiary receives the distribution directly, but must redeposit the full amount into their own IRA or another eligible retirement account within 60 days to avoid it being treated as a taxable distribution. Missing this 60-day window results in the distribution becoming taxable income and potentially subject to early withdrawal penalties if the beneficiary is under age 59½.

Navigating Required Minimum Distributions

Required Minimum Distributions (RMDs) are amounts that must be withdrawn from inherited IRAs annually, with rules varying based on the beneficiary’s status and choices made. For a spouse who rolls over the inherited IRA into their own, RMDs begin when the spouse reaches their own required beginning date, currently age 73. If a spouse chooses to keep the account as an inherited IRA, RMDs may be based on their life expectancy or the deceased’s.

Non-spousal beneficiaries subject to the 10-year rule must distribute the entire account balance by the end of the 10th year following the original owner’s death. If the original account owner died on or after their required beginning date, non-spousal beneficiaries are also required to take annual RMDs during the 10-year period. Failure to take a required RMD can result in an excise tax of 25% on the amount not withdrawn, though this penalty can be reduced to 10% if corrected within two years.