Inherited IRA

Non-spouse beneficiaries of an IRA or an employer-sponsored retirement plan, such as a 401(k), can enjoy some of the same benefits as surviving spouses by rolling over their inherited retirement account assets into an Inherited IRA.

This option extends to some beneficiaries the ability to spread distributions (and tax obligations) over the course of their lifetime, while keeping the balance invested in an IRA where it can potentially compound tax-deferred.

• Inherited IRAs must be established through a direct trustee-to-trustee transfer. If the beneficiary receives the distribution directly from the IRA or retirement plan, the money is not rollover eligible and may not be invested in a Inherited IRA.
• Non-spouse beneficiaries cannot combine Inherited IRAs with other IRAs or make additional contributions to an Inherited IRA. (Spouses, on the other hand, still have the option to assume the inherited account and combine it with an existing IRA.)
• Some retirement plans will require non-spouse beneficiaries to receive the entire account balance within five calendar years of the participant’s death. However, if the inherited plan assets are transferred to an Inherited IRA by the end of the year following the participant’s death, the non-spouse beneficiary may be able to take annual minimum distributions based on his or her life expectancy.
• Retirement plans are not required to offer this rollover option to non-spouse beneficiaries.