If you’ve received an inherited IRA, a common question is: Can you rollover an inherited IRA into your own account? Inheriting an IRA can offer financial advantages, but the rules surrounding rollovers depend on several factors, including your relationship to the original account holder.
Some inherited IRAs allow for rollovers under specific conditions, while others are subject to strict limitations.
What Is an Inherited IRA?
An inherited IRA is a retirement account passed to a beneficiary after the original owner’s death. Both spousal and non-spousal beneficiaries may inherit these accounts, but the rules for managing and withdrawing the funds vary. The type of IRA and your relationship to the deceased will determine your options for accessing and transferring the funds.
Can You Rollover an Inherited IRA?
The answer to the question “can you rollover an inherited IRA” depends on your relationship to the deceased and the kind of IRA.
Spousal Beneficiaries: Rollover Options
A surviving spouse has the unique ability to transfer the inherited IRA into their own IRA. This option is not available to non-spouse beneficiaries.
Once the IRA is transferred into the spouse’s own account, it is treated like any other personal IRA. Required minimum distributions (RMDs) can be postponed until age 73 (or 75, depending on birth year), offering greater flexibility with tax planning and withdrawal timing.
To complete this transfer, a direct trustee-to-trustee transfer must occur. This process helps keep the rollover compliant and avoids triggering unnecessary taxes or penalties. After the transfer is complete, the new IRA follows standard rules, including eligibility for continued contributions if income limits are met and RMDs based on the account holder’s age.
Non-Spousal Beneficiaries: Rollover Restrictions
For non-spousal beneficiaries, the rules are far more restrictive. In most cases, you cannot rollover an inherited IRA into your personal IRA. Instead, you are required to open an inherited IRA in your name and follow distribution guidelines established by the IRS.
The SECURE Act mandates that most non-spousal beneficiaries must fully withdraw the inherited funds within 10 years of the original account holder’s death. However, eligible designated beneficiaries (EDBs), including minor children and individuals with disabilities, may follow a different timeline.
Since rollovers are not allowed for non-spousal beneficiaries, careful withdrawal planning becomes essential. You may choose to take annual distributions over the 10-year period to avoid increasing your taxable income significantly in any single year.
Tax Implications of Inherited IRA Withdrawals
If you are a spousal or non-spousal beneficiary, inherited IRA withdrawals are subject to taxes. The key difference between traditional IRAs and Roth IRAs is how these taxes are applied.
Tax Treatment of Traditional IRAs
Withdrawals from inherited traditional IRAs are taxed as ordinary income. The distribution amount is added to your annual income, which may increase your overall tax liability. If the withdrawal is large enough, it could even push you into a higher tax bracket.
Spouses who roll over an inherited traditional IRA into their own account will follow the same tax rules that apply to their personal IRA. Required minimum distributions will begin at age 73, and the distributions will be taxed at the standard income rate.
Tax Treatment of Roth IRAs
Roth IRAs work a bit differently. For Roth IRA beneficiaries, distributions are generally tax-free, provided the account has been open for at least five years, and the account holder was at least 59½ years old at the time of their death. If these requirements are met, the withdrawals you make from the inherited Roth IRA will not be subject to tax.
If the Roth IRA has not met the five-year requirement or if you do not meet the age requirement, the earnings on the Roth IRA may be subject to tax and penalties. However, the contributions you withdraw from a Roth IRA are tax- and penalty-free, as you have already paid taxes on them.
Strategies for Managing an Inherited IRA
Maximize the Use of a Nevada Asset Protection Trust
If you are concerned about protecting your inherited IRA from creditors or lawsuits, consider utilizing a Nevada asset protection trust. Nevada has some of the strongest asset protection laws in the country, and using this type of trust can help make sure your inherited IRA remains secure.
This trust can shield your retirement assets from claims, while also offering tax-efficient withdrawal strategies. If asset protection is a priority, consulting with a trust professional would be of great help.
Consider a Roth IRA Conversion
If you inherit a traditional IRA, converting it to a Roth IRA might be a smart strategy to consider. Converting traditional IRA funds to a Roth IRA gives you the opportunity to pay taxes on the converted amount now. Meanwhile, future withdrawals will be tax-free. This approach may be especially useful if you anticipate being in a higher tax bracket later or if you aim to minimize taxes on required withdrawals in the future.
A self-directed IRA can also be a useful tool here, as it offers more flexibility in choosing investments, which can help grow your funds in a tax-efficient way.
Strategic Withdrawals and Timing
If you are a non-spousal beneficiary, managing the 10-year withdrawal rule is important. Taking small, strategic withdrawals over time can help keep your taxable income lower.
This approach reduces the risk of being pushed into a higher tax bracket. It can minimize the tax impact of your inherited IRA while still allowing you to meet the withdrawal requirements.
How Nevada Trust Company Can Help
Nevada Trust Company delivers comprehensive services to help you manage an inherited IRA. If you are interested in setting up a self-directed IRA, seeking custody and escrow services, or exploring asset protection options with a Nevada asset protection trust, our team is here to guide you.
So, can you rollover an inherited IRA? The answer depends on whether you are a spouse or a non-spouse beneficiary. Spousal beneficiaries have more flexibility, including the option to roll over the IRA they inherited into their own account, while non-spousal beneficiaries must adhere to the 10-year rule for withdrawals.
Understanding the tax implications and planning your withdrawals accordingly will help you make the most of your inherited IRA.
