Warning against Taking Distributions from Inherited IRAs

These days, it’s becoming increasingly common for individuals to inherit IRAs. By inheriting an IRA, we mean when you become entitled to some or all of the balance in a deceased account owner’s traditional IRA or Roth IRA by virtue of being designated as an account beneficiary.

In this scenario, you may think your share of the inherited IRA can be distributed to you and then rolled over tax-free into your own IRA before the familiar 60-day deadline for rollovers has passed. While this seems like a very reasonable assumption, it is incorrect. In fact, only the deceased IRA owner’s surviving spouse is allowed to roll over distributions from the inherited IRA into his or her own IRA. Nobody else can.

Fortunately, there are ways to finesse the “no rollover rule” so that you can take control of your share of an inherited IRA without adverse tax consequences. However, to make this work you must follow some important rules, one of which is that you cannot receive an outright distribution from the account. If you do so and are not the deceased account owner’s surviving spouse, you can’t put the money back into an IRA and continue earning tax-deferred income (or possibly tax-free income if the inherited account is a Roth IRA). Furthermore, if you receive an outright distribution from an inherited traditional IRA and are not the deceased account owner’s surviving spouse, you must include the distribution in your taxable income. Depending on the circumstances, an outright distribution from a Roth IRA may result in taxable income to you as well.