IRAs are tax-deductible retirement accounts. When you invest money in a traditional IRA, you are able to deduct the amount you invest from your taxes in order to invest with pretax dollars. The government limits the amount of money you are allowed to invest with these pretax dollars in an IRA every year, and the IRS has specific rules regarding IRAs. Some of these specific rules, detailed in Publication 17 of the Tax Code, relate to rolling over inherited IRAs.
Inheriting an IRA From Your Spouse
When you inherit an IRA from your deceased spouse, the IRS gives you three options for managing the inherited IRA. First, you can simply leave the money where it is and designate yourself as the new account holder. This is considered "treating it as your own IRA," and is one of several methods of "treating it as your own."
Your second option is to move the money (or "roll it over") into your own IRA or one of several other investment vehicles that you may have in your name. For example, you could roll the IRA over into a qualified employer retirement plan, a 403(a) annuity plan, a 403(b) annuity plan or a 457 plan (available to employees of state or local governments), if you have any of these plans in your name. This is also considered to be "treating it as your own" by the IRS.
The third option involves acting as the beneficiary for the IRA, instead of treating the IRA as your own. This means you leave the money where it is, in the deceased person's name, and take the required minimum distributions from it. With this option, you have to be paid a certain minimum amount of money each year from the IRA, and you can't invest more money in the IRA.
When You Can't Treat Your Deceased Spouse's IRA As Your Own
You cannot treat an inherited IRA as your own or roll it over if there are other beneficiaries named on the IRA (i.e., the money was left to someone else) or if you don't have unlimited rights to withdraw money from the IRA.
Even if you can't treat the IRA as your own, you can take some money out of your deceased spouse's IRA and roll that money over into your own IRA within 60 days of withdrawing the money. That means you can take out the money in the IRA that was left to you, and not pay taxes on the money when you take it out (as you normally would have to for taking money out of an IRA), as long as you put the money back into your own IRA account within 60 days. This essentially allows you to roll the money over into your own IRA even if there are other beneficiaries who also inherited part of the money.
Inheriting an IRA from a Non-Spouse
If you inherit money in a traditional IRA from anyone other than your spouse, you can't roll it over into your own retirement accounts. You also cannot treat the account as your own, and you can't deposit any money into it. You are just a beneficiary, and you are limited to receiving payments. However, you can move the money if you need to, as long as you set up a new account in the name of the deceased person. This is called a trustee-to-trustee transfer. You move the money from one account to the new account, keeping both accounts in the original person's name, for the "benefit of the beneficiary" (you).
IRA Rollover Distribution Rules
You don't usually have to set up a new account for a rollover IRA. If you do, it works much as the...
IRA Rollover Rules for a Spouse Beneficiary
Spouses who inherit IRAs have special benefits under IRS rules not available to non-spouse beneficiaries. Spouses may rollover an inherited IRA to...