If you inherited an individual retirement account (IRA) from anyone other than your spouse, you cannot roll it over into your own IRA accounts. The Internal Revenue Service (IRS) provides several options for non-spousal beneficiaries, and regulations also depend on whether the decedent was already taking required minimum distributions from the account.
Trustee-to -Trustee Transfers
If you inherit an IRA from someone other than your spouse, you cannot make any additional contributions to it. A trustee-to-trustee transfer allows the inherited IRA assets to be maintained in the name of the original, now deceased owner for your benefit as the named beneficiary on the account. This transfer must remain in the same financial institution. By law, you must take distributions from the account under beneficiary distribution regulations.
If the decedent was not yet age 70 1/2, the mandatory age at which traditional IRA distributions must begin, the beneficiary may opt for the five-year rule, which allows assets to be withdrawn prior to December 31 of the fifth year following the death of the decedent. The beneficiary may withdraw funds from the account in any amount during this time frame. The IRS waives penalties for beneficiaries not taking any required minimum distributions if the account closes by the fifth anniversary.
For either Roth or traditional inherited IRAs, beneficiaries must take required minimum distributions based on life expectancy. The IRS provides a single life expectancy table to make these calculations. Both types of accounts require the beneficiary to take the required minimum distributions by age 70 1/2, but like personal Roth IRA accounts, the Roth beneficiary's distributions are tax-free, while the traditional IRA beneficiary must pay ordinary income taxes on withdrawals. For tax-free eligibility, the decedent must have opened the Roth IRA account at least five years prior to his death. If multiple beneficiaries inherit the account, the distributions are calculated based on the eldest beneficiary's life expectancy.
Because the regulations governing inherited IRAs may be complex, discuss your particular situation with a financial adviser or representatives of the financial institution holding the inherited IRA. The IRS requires that any decision regarding inherited IRAs be made within nine months of the decedent's death. If the decedent was already taking required minimum distributions from the account, your options are more limited. In that case, you must choose between taking distributions based on your life expectancy or withdrawing all of the assets.
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