Inherited Or Beneficiary IRAs

Inherited or Beneficiary IRAs

If you inherit an IRA, you are called a beneficiary. A beneficiary can be any person or entity the owner chooses to receive the benefits of the IRA after he or she dies. Beneficiaries of a traditional IRA must include in their gross income any taxable distributions they receive.

Inherited from spouse

If you inherit a traditional IRA from your spouse, you generally have the following three choices. You can:

Treat it as your own IRA by designating yourself as the account owner
Treat it as your own by rolling it over into your traditional IRA, or to the extent it is taxable, into a:
1. Qualified employer plan
2. Qualified employee annuity plan (section 403(a) plan)
3. Tax-sheltered annuity plan (section 403(b) plan)
4. Eligible deferred compensation plan of a state or local government (section 457(b) plan)
Treat yourself as the beneficiary rather than treating the IRA as your own

Treating it as your own

You will be considered to have chosen to treat the IRA as your own if:

Contributions (including rollover contributions other than from other IRAs inherited from the same spouse) are made to the inherited IRA
You do not take the required minimum distribution for a year as a beneficiary of the IRA

You will only be considered to have chosen to treat the IRA as your own if:

You are the sole beneficiary of the IRA, and
You have an unlimited right to withdraw amounts from it

However, if you receive a distribution from your deceased spouse's IRA, you can roll that distribution over into your own IRA within the 60-day time limit, as long as the distribution is not a required distribution, even if you are not the sole beneficiary of your deceased spouse's IRA.

If you choose to have the IRA treated as your own, then any distributions that you take from it before you attain age 59 ½ will be subject to the 10% early distribution tax, unless an exception applies. If you do not so choose, this tax will not apply to pre-age 59 ½ distributions to you.

Inherited from someone other than spouse

If you inherit an IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. This means that you cannot make any contributions to the IRA. It also means you cannot roll over any amounts into or out of the inherited IRA. However, you can make a transfer from an IRA under one IRA custodian or trustee to that of another as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary.

You must begin receiving distributions from the IRA under the rules for distributions that apply to beneficiaries. Like the original owner, you generally will not owe tax on the assets in a traditional IRA until you receive distributions from it.

IRA with basis

If you inherit an IRA from a person who had a basis in the IRA because of nondeductible contributions, that basis remains with the IRA. Unless you are the decedent's spouse and choose to treat the IRA as your own, you cannot combine this basis with any basis you have in your own IRA(s) or any basis in IRA(s) you inherited from other decedents. If you take distributions from both an inherited IRA and your IRA, and each has basis, you must complete separate Forms 8606 to determine the taxable and nontaxable portions of those distributions.

Federal estate tax deduction

A beneficiary may be able to claim an income tax deduction for estate tax resulting from certain distributions from a traditional IRA that were taxable to the beneficiary. The beneficiary can deduct the estate tax paid on any part of a distribution that is income in respect of a decedent. He or she can take the deduction for the tax year that the income is reported.

Pension Protection Act of 2006

With this Act, a non-spouse beneficiary of a 401(k) or other tax-qualified plan can now directly roll plan benefits to an IRA and even convert those benefits so that they will be held in a Roth IRA. Only the spouse had previously been able to do this.