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 are the sole beneficiary, there are two ways to take control of the account:
- Treat it as your own. When you designate yourself as the account owner, the distribution rules will be the same as if you'd owned the IRA all along.
- 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 to avoid potential adverse tax consequences. You can do only one indirect IRA-to-IRA rollover within a 365-day period ("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 inherited IRA funds 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.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.
When someone other than my spouse leaves me an IRA
You can't roll over the account into your own IRA, but there are a couple of other options:
- 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. Generally, the assets will have to be distributed within 10 years of the account owner's death unless an exception applies.Footnote 2 However, if you are an "eligible designated beneficiary," you may withdraw a minimum amount each year over your life expectancy beginning in the year following the decedent's death.Footnote 2
"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.