Inherited IRA Planning Decisions Part Three

This is the third and concluding post about some options you might have if you inherit an IRA or benefit from an employee sponsored benefit plan.

If you're a non-spouse beneficiary of an IRA or benefit from an employee sponsored benefit plan, you unfortunately generally have far fewer options.

For example, you can't roll over a distribution from an employer retirement plan into your own IRA but you can generally directly roll the distribution over into an inherited IRA. Like spouse beneficiaries, you can also roll over ("convert") non-Roth distributions from an employer plan into a Roth IRA (however, you must do so in a direct rollover).

Do keep in mind that certain restrictions apply to rollovers.

For example, you cannot roll over required minimum distribution amounts (i.e., distributions required in the year of death).

Additionally, inherited Roth IRAs can only be rolled over into a Roth IRA, and inherited Roth 401(k)/403(b)/457(b) accounts can only be rolled into another Roth 401(k)/403(b)/457(b) account that accepts rollovers, or into Roth IRAs.

Finally, Roth IRAs are subject to different rules.

If you inherit a Roth IRA, you can take distributions over a five-year period (following the Roth IRA owner's death) or over your remaining life expectancy.

If you are a surviving spouse beneficiary, you may be able roll the assets over to your own Roth IRA or, if you're the sole beneficiary, treat the Roth IRA as your own.

This is significant because, as a Roth IRA owner, you do not have to take any distributions from the Roth IRA during your life. Distributions from an inherited Roth IRA are usually free from income tax if made at least five years after the first contribution to the Roth IRA.

The rules governing inherited IRAs and employer-sponsored plan accounts are complex.  Consult a tax advisor for more information. Neither Blaine Bowers nor the Strategic Financial Alliance provide tax or legal advice.