The short answer is yes, if you inherit the IRA from a spouse. But a rollover to your own IRA is not allowed if you inherit the IRA from anyone else.Footnote 1
Before we dive in, keep in mind that tax rules surrounding inherited IRAs are complicated, and it's easy to make mistakes. So be sure to consult a tax advisor before making any decisions.
When my spouse leaves me an IRA
If you inherit the IRA from your spouse, there are two ways to take control of the account. Please note: The spouse must make the election by the later of (1) December 31st of the calendar year in which they attain age 72, or (2) December 31st of the year following the calendar year of the IRA owner's death. If the surviving spouse wishes to treat the IRA as their own after that deadline, the surviving spouse will need to calculate and withdraw "hypothetical RMDs" to account for the time period that passed since the death.
- Treat it as your own. When you elect to treat the decedent's IRA as your own IRA, the distribution rules will be the same as if you'd owned the IRA all along. You can only make this election if you are the sole beneficiary of the IRA and have an unlimited right to withdraw amounts from it.
- Roll it into an existing IRA. If you already have an IRA, you can roll over the inherited assets to another traditional IRA in your name or convert the assets to a Roth IRA. The simplest way to do that is through a direct, trustee-to-trustee transfer from one account to the other or between one IRA custodian and another. You also could complete an "indirect" IRA-to-IRA rollover, where you take a distribution from the inherited assets and then "roll" those assets into your own already-existing IRA. However, in that case, you'll need to deposit the money into your IRA within 60 days of receiving the distribution to avoid potential adverse tax consequences. You can do only one indirect IRA-to-IRA rollover within a 365-day period (transfers and "conversions" or rollovers from traditional IRAs to Roth IRAs are not subject to the limit). And remember that when converting to a Roth IRA, you will have to pay taxes on the amount you convert to the extent that the funds have not been previously taxed as income.
In either case, the tax treatment of the IRA funds that you inherit generally will be based on your age, not your spouse's. That means you may have to pay an additional 10% federal tax for premature distributions, in addition to income taxes, on withdrawals before you turn 59½, unless an exception applies, and you'll generally have to take annual required minimum distributions (RMDs) starting at age 72 the required beginning date.Footnote 1 Remember, if you are the spouse, any RMDs that the decedent did not satisfy for the year of the decedent's death generally must be taken before the assets can be moved to your own IRA.
If you are a spouse inheriting an IRA, you alternatively can choose to treat the IRA as an inherited IRA in the same manner as a non-spouse, as described below.
When someone other than my spouse leaves me an IRA
- Open an "inherited IRA" account. As the name implies, inherited IRAs are created specifically for accounts that someone else leaves you. The account remains in the name of the deceased, and you are the beneficiary which means that you will not be able to make any additional contributions to the inherited IRA.
You do not have the option to roll over the account into your own IRA, and your choices for distributing the value of the account will depend on whether you're considered an "Eligible Designated Beneficiary" (EDB). An EDB is a surviving spouse, a disabled or chronically ill individual, an individual who is not more than 10 years younger than the decedent, or a child of the account owner who has not yet reached age 21. Distribution rules also will differ based on the date of the account owner's death, and whether or not the original account owner died before or after their required beginning date for Required Minimum Distributions. The rules are complex and distributions have tax implications. You should consult your personal tax advisor regarding your specific situation before making any decisions.
"Tax rules surrounding inherited IRAs are complicated, and it's easy to make mistakes. So be sure to consult a tax advisor before making any decisions."
— Debra Greenberg, Director, Personal Retirement Strategy and Solutions, Bank of America
- Withdraw the money. If you take a lump-sum distribution, you won't be subject to the additional 10% federal tax on early withdrawals, even if you're younger than 59½, but you will need to pay income tax on the amount that is taxable.
Regardless of the path you choose, it bears mentioning again that consulting a tax advisor is the best way to ensure that you're adhering to the complicated tax rules that govern inherited IRAs.