Beneficiary Transfers Between IRAs

Kimberly Flett

For beneficiaries of an inherited IRA, caution is necessary in order to avoid expensive tax consequences. This article addresses some of the items of specific focus.

When an IRA owner bequeaths a traditional IRA to a designated beneficiary, the options for rollover depends on whether the beneficiary is spouse or other designated individual. A surviving spouse has generally three options under IRS rules. The spouse as beneficiary may treat the IRA as his or her own by retitling the account in the surviving spouse’s name, rolling over the IRA into another plan such as an IRA, qualified plan including 401(k), 403(b) or certain 457 plans, or opting to be treated as a beneficiary which will maintain the account in the name of the deceased spouse. With the inherited IRA retitled accordingly (treating it as “your own”), the surviving spouse is able to make a trustee-to-trustee transfer by moving a current IRA from one investment platform to another.

Treating the spousal inherited IRA as its own is allowable only if the spouse is the beneficiary with unlimited withdrawal restrictions. The surviving spouse in these circumstances is eligible to make contributions into the IRA and is not required to take a required minimum distribution the year of inheritance.

Currently there are no Code or Regulation provisions that allow a beneficiary of a deceased IRA owner to request a direct transfer between trustees/custodians. Trustee-to-trustee transfers for non-spousal beneficiaries are allowable as long as the IRA is named after the IRA owner that is deceased with the named beneficiary making the transfer. Such allowances have been available through Private Letter Rulings issued on the subject of transfers by beneficiaries. Beneficiaries other than a spouse cannot make contributions to a traditional inherited IRA, or rollover amounts accordingly.

Upon distribution, the non-spousal beneficiaries have to include the amounts in gross income and do not have the option of a 60-day grace period to roll over the IRA. Retitling the IRA to the beneficiary’s name begins the distribution of assets taxable at ordinary income tax rates plus related penalties. In order to keep these transactions tax free and allow for trustee to trustee transfers, non-spousal beneficiaries should retitle the IRA to maintain both the names of the original owner and beneficiary. This is commonly seen as FBO “for the benefit of.” The IRA needs to be listed in the title as well. It is only possible to make a trustee to trustee transfer when the account is retitled in this manner.

Most providers of IRAs require proof from the beneficiary that the original IRA taxpayer is in fact deceased. Note many vendors are not prepared to give tax advice. In all inherited IRA situations further attention is needed to ensure required minimum distributions are carefully observed to ensure the IRA is making such distributions timely as required under the Internal Revenue Code. Note either spousal or non-spousal beneficiaries have the option of taking inherited funds as a taxable distribution, with Roth earnings impacted by a tax consequence if withdrawn within five years.

IRS rulings in recent years have limited IRA-to-IRA rollovers to all IRAs maintained by a taxpayer within a 12-month period. Note that trustee-to-trustee transfers are without limitation except for those noted for non-spousal beneficiaries in this article. A traditional IRA to a Roth IRA conversion is also not limited. In general once IRA assets are maintained with a qualified plan such as a 401(k) plan, rollover frequency is determined by the terms of the plan document.

Upon inheriting an IRA, it is important to seek the guidance from a qualified tax advisor when making important decisions related to the account in order to avoid a potentially hefty tax consequence.

Kimberly Flett is Managing Director, National Practice Leader ERISA, STS Compensation and Benefits.

Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA or its members.