Can I Rollover an Inherited IRA?
Inheriting an Individual Retirement Account (IRA) can be a significant financial windfall, but it also brings with it a set of complex decisions, especially when it comes to managing the inherited IRA. One of the most common questions people have is whether they can rollover an inherited IRA. The answer to this question depends on several factors, including the type of IRA, the relationship between the original account holder and the inheritor, and the tax implications involved.
An inherited IRA is an IRA that is passed on to someone after the original account holder’s death. The rules governing inherited IRAs are different from those of traditional IRAs, and understanding these rules is crucial for making informed decisions about the inherited IRA.
Understanding the Types of Inherited IRAs
There are two main types of inherited IRAs: the stretch IRA and the non-skip person IRA. The stretch IRA allows the beneficiary to take distributions over their lifetime, which can be an effective way to minimize taxes. On the other hand, the non-skip person IRA requires the entire balance to be distributed within five years of the original account holder’s death.
Can You Rollover an Inherited IRA?
The short answer to whether you can rollover an inherited IRA is yes, but there are important considerations to keep in mind. You can rollover an inherited IRA into a new IRA or a qualified plan, such as a 401(k) or a 403(b). However, there are specific rules that apply to rollovers of inherited IRAs:
1. Direct Rollover: You must perform a direct rollover, which means the funds are transferred directly from the inherited IRA to the new IRA or qualified plan. This avoids the issue of receiving a taxable distribution.
2. Five-Year Rule: If you rollover an inherited IRA within five years of the original account holder’s death, the rollover is considered a non-taxable event. However, any subsequent rollovers within the five-year period will be treated as taxable distributions.
3. Required Minimum Distributions (RMDs): If you rollover an inherited IRA, you will still be required to take RMDs based on your life expectancy, just like with a traditional IRA.
What Are the Tax Implications?
Rollovering an inherited IRA can have significant tax implications. Here are some key points to consider:
1. Income Tax: If you rollover an inherited IRA within five years of the original account holder’s death, the rollover is tax-free. However, if you rollover the IRA after the five-year period, the rollover will be taxed as ordinary income.
2. Early Withdrawal Penalties: If you are under the age of 59½ when you rollover an inherited IRA, you may be subject to early withdrawal penalties, unless you qualify for an exception.
3. Estate Taxes: In some cases, the rollover may be subject to estate taxes, depending on the value of the inherited IRA and the estate tax laws in your jurisdiction.
Conclusion
In conclusion, you can rollover an inherited IRA, but it’s essential to understand the rules and tax implications involved. Consulting with a financial advisor or tax professional can help you make the best decision for your situation. Whether you choose to rollover the inherited IRA or take distributions over time, it’s crucial to consider your financial goals, tax obligations, and the impact on your overall retirement plan.
