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Can I Roll-Over an Inherited IRA?

Last Updated August 31, 2011

Question: 

 

I inherited a traditional IRA from my uncle who was 65 years old when he died. Can I rollover or transfer the account to my own IRA? My uncle died in July of last year.

Answer: 

No. You cannot rollover or transfer an IRA that you inherited from your uncle to your own IRA, because you are a non-spouse beneficiary. A non-spouse beneficiary is defined as a beneficiary that is not the surviving spouse of the deceased IRA owner. Instead , you may transfer the funds to an Inherited IRA . An Inherited IRA is one that is registered in the names of the decedent and the beneficiary ( in this case, your name and your uncle’s { the decedent} name), using your social security number. An example of a registration that satisfies the IRS requirements is: IRA FBO Jim P, Beneficiary of Tom S (Deceased)”. Any variation of this will work, as long as it is clear who is the beneficiary and who is the decedent. Some financial institutions may shorten ‘beneficiary’ to read ‘bene’, ‘beneficiary of ‘to read ‘B/O’ and/or ‘deceased’ to read ‘decd’.

As a non-spouse beneficiary of an IRA owner who died before his required beginning date (RBD), your distribution options are as follows:

  1. Distribute the assets over your life-expectancy ( the life-expectancy method). Under the life expectancy method, you must take a required minimum distribution (RMD) amount each year. Your first RMD amount would be due by December 31 of this year (the year after the year that your uncle died). You can withdraw more than the RMD amount- up to the entire balance – at anytime. 
  2. Distribute the assets under the five-year rule. Under the five year rule, the entire balance must be distributed by December 31, of the 5th year, following the year your uncle died. For instance, if he died in 2010, the assets must be fully distributed by December 31, 2015. Any distributions before then are optional.

If you fail to withdraw your RMD amount by the deadline, you will owe the IRS an excess accumulation penalty of 50% of your RMD shortfall. For instance, if your RMD for the year is $10,000, and you withdraw only $2,000, you will owe the IRS an excess accumulation penalty of $4,000 ($8,000 x 50%). Distributions from your inherited IRA cannot be rolled over; however, you can transfer amounts to another inherited IRA, providing the receiving inherited IRA is registered in both your’s and your uncle’s name.

 

Denise Appleby, IRA Guru answers IRA questions