|How you treat a traditional IRA that you have inherited depends on whether you inherited the retirement plan from a spouse or from someone other than a spouse.
Inherited From a Spouse
If you are the beneficiary of an IRA owned by your deceased husband or wife, you have three choices as to how to handle the account. You are entitled to:
- Treat it as your own by designating yourself as the account owner. The Internal Revenue Service will consider the IRA as your own if you make contributions, including rollover contributions, to the inherited IRA, or if you do not take the minimum distribution for a year as its beneficiary. You are not entitled to treat it as if you own it unless you are the sole beneficiary of the inherited IRA and you have an unlimited right to withdraw amounts from it.
- Treat it as your own by rolling it over into your own traditional IRA or, to the extent that it is taxable, into certain qualified employer or employee plans or into a tax-sheltered annuity plan.
- Treat yourself as the beneficiary instead of treating yourself as the owner.
Inherited From Someone Other Than a Spouse
If you are inherited the traditional IRA from someone other than a deceased spouse, you are not permitted under current federal tax law to treat the IRA as your own. In other words, you cannot make any contributions to the inherited IRA nor can you roll over any amounts into or out of it. However, you are entitled to make a trustee-to-trustee transfer as long as the IRA into which the amounts are being transferred is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary.
In addition, a traditional IRA inherited from someone other than a spouse cannot be converted into a Roth IRA.
Distributions From an Inherited IRA
If you received a lump-sum distribution from a traditional IRA that you inherited, all or some of it may be taxable. The distribution will be taxed in the year received as income in respect of a decedent up to the decedent's taxable balance. The decedent's taxable balance is his or her balance at the time of death, including unrealized appreciation and income accrued up to the date of death, minus any nondeductible contributions. You can deduct the estate tax paid on any part of a distribution that is income with respect of a decedent in the year the income is reported.
Any distributions that are more than the decedent's entire IRA balance at the time of death, including both taxable and nontaxable amounts, is income of the beneficiary.
Copyright 2013 LexisNexis, a division of Reed Elsevier Inc.