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
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 could also take a distribution from the inherited assets and complete an "indirect" rollover. However, in that case, you'll need to deposit the money into your IRA within 60 days to avoid tax complications. (You can only do one 60-day rollover within a 365-day period.) And remember that when converting to a Roth IRA, you will have to pay taxes on the amount you convert.
In either case, the tax treatment of the inherited IRA funds will be based on your age, not your spouse's. That means you may have to pay an additional 10% tax for premature distributions, in addition to income taxes, on withdrawals before you turn 59½, and you'll 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 must be taken before the assets can be moved to an inherited IRA or 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 If you meet one of the exceptions, your distributions may be impacted by the original account owner's age at the time of that person's passing, and by whether they had reached the required beginning date (RBD) for their RMDs.Footnote 1,3
"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% early withdrawal tax, 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.