Can You Transfer an IRA to Another Person?

Transferring an Individual Retirement Account (IRA) to another person raises many questions for account holders. Understanding the rules around ownership and inheritance is crucial, as these decisions carry significant financial consequences. This article delves into the complexities of transferring IRAs, highlighting key considerations and challenges.

Ownership vs Beneficiary Status

Ownership of an IRA cannot be transferred during the account holder’s lifetime. The account is tied to the individual’s Social Security number and follows strict contribution limits and tax benefits. While investments can be changed or the account moved to another institution, ownership remains non-transferable.

Beneficiary status comes into play upon the account holder’s death. The designated beneficiary—often a spouse or child—inherits the IRA’s assets, with this designation overriding instructions in a will. Keeping beneficiary designations updated ensures the intended recipient receives the assets. If no beneficiary is named, the IRA may default to the estate, complicating distribution and increasing tax liabilities.

Beneficiaries have options for managing the inherited IRA: taking a lump-sum distribution, rolling the assets into an inherited IRA, or, for spouses, treating the IRA as their own. Each option carries distinct tax consequences and withdrawal requirements. Non-spousal beneficiaries must comply with the 10-year rule, which mandates full distribution of the IRA within ten years of the account holder’s death under the SECURE Act of 2019. This accelerated timeline can create tax burdens and affect financial planning.

Spousal and Non-Spousal Inheritances

The rules for inheriting an IRA differ for spouses and non-spouses. Spouses can roll the inherited IRA into their own account, allowing them to delay required minimum distributions (RMDs) until age 73 under the SECURE Act 2.0. They may also continue contributing if eligible, enabling more control over tax planning and distribution timing.

Non-spousal beneficiaries, however, must adhere to the 10-year rule, requiring the entire balance to be withdrawn within a decade of the original account holder’s death. This can result in significant tax implications, particularly for beneficiaries in high-earning years. Strategic planning, such as spreading withdrawals over the ten-year period, can help mitigate tax liabilities.

Tax Liabilities and Withdrawal Penalties

IRA withdrawals are taxed as ordinary income, based on the individual’s tax bracket at the time of withdrawal. Federal income tax rates for 2024 range from 10% to 37%, with state taxes adding an additional burden—up to 13.3% in California and 10.9% in New York.

Withdrawals made before age 59½ incur a 10% penalty, unless they qualify for exceptions like higher education expenses or a first-time home purchase. The SECURE Act 2.0 raised the RMD age to 73 and reduced the penalty for missed RMDs to 25% of the undistributed amount. For example, failing to withdraw a required $10,000 would result in a $2,500 penalty.

Conditions for Trustee to Trustee Transfers

Trustee-to-trustee transfers enable IRA assets to move directly between financial institutions without tax liabilities, provided certain criteria are met. This process avoids personal possession of the funds and bypasses the 60-day rollover rule, which requires funds to be redeposited into another IRA within 60 days to avoid taxes and penalties.

Such transfers are useful for consolidating accounts or accessing improved investment options. They also avoid the one-rollover-per-year rule, which limits how often rollovers can occur and may lead to tax consequences if violated.

Required Forms and Documentation

Completing an IRA transfer requires precise documentation. For inherited IRAs, beneficiaries must submit a certified copy of the account holder’s death certificate and the institution’s beneficiary claim form. These documents confirm the transfer and ensure proper tax treatment.

For trustee-to-trustee transfers, the account holder must fill out a transfer authorization form from the receiving institution, which includes details about the existing IRA. Some institutions may also request a recent account statement to verify balances and holdings. The receiving institution typically coordinates the transfer with the current trustee.

IRS Form 1099-R and Form 5498 are essential for documenting IRA transfers. Form 1099-R reports distributions, even when tax-free, while Form 5498 confirms contributions or rollovers into the new IRA. Retaining these forms is crucial for tax records, as incomplete documentation can delay transfers and lead to unintended tax consequences. Accuracy is vital to avoid complications.