So you’ve come in control of an inherited IRA? There are a few things to keep in mind when this happens. First, let’s assume that you inherit an IRA from your deceased spouse.
If you inherit a traditional IRA from your spouse you can do the following
Assume ownership of the inherited IRA and treat it as your own
- Roll it over into your IRA account. If it is taxable you can roll it over into a
- Qualified employer plan
- Qualified employee annuity plan (section 403(a) plan)
- Tax-sheltered annuity plan (section 403(b) plan)
- Deferred compensation plan of a state or local government (section 457 plan), or
- Consider yourself as the beneficiary of the inherited IRA instead of actually taking control of it as your own
If you automatically be assumed to have taken control of it as your own if contributions are made (including any rollovers) to the inherited IRA account or if you do not take out the required minimum distributions for at least a year as a beneficiary of the inherited IRA
You will only be considered to have chosen to treat the account as your own if you are the sole beneficiary of the inherited IRA and you have unlimited withdrawal rights from it.
If you obtain an inherited IRA from someone other than your spouse
You cannot make any contributions or rollover any amount of money into or out of your inherited IRA, including a 401k rollover to Roth IRA. You can, however, make any trustee-to-trustee transfers between inherited IRAs from the same deceased IRA owner for the benefit of you as a beneficiary. When IRA withdrawals happen, you will owe taxes as normal. You must being and continue receiving distributions for this IRA under the rules for inherited IRA beneficiaries.
IRA with basis
If you receive an inherited IRA from a person that had their basis in the IRA due to nondeductible contributions, that basis remains with your inherited IRA. Unless you are the spouse of the deceased and choost to treat the inherited IRA as your own, you cannot combine this basis with any other basis. If you take distributions from both an inherited IRA and your own personal IRA accounts with both having basis, you must complete form 8606 to determine how what is taxable and not taxable from those distributions.
Federate estate tax reduction
A beneficiary can claim an estate tax deduction resulting from distributions from a traditional IRA when receiving an inherited IRA. The beneficiary can deduct estate tax paid on any part of a distribution that is income in respect to the deceased in the year that income is reported. Surviving spouses can rollover the distribution to a different IRA to avoid including it in income for the year received. If the account gets rolled over to a Roth IRA account, you can do a Roth IRA withdrawal following all of the Roth IRA withdrawal rules and Roth IRA qualifications.
