Non-Spouse Rollover of Inherited IRA or Plan

Photo credit: diedoe

When you inherit an IRA from someone other than your spouse, you are able to take advantage of certain protections or deferrals of tax inherent in the IRA, but you are somewhat restricted in your actions with the account.  These non-spouse rollover rules also apply to a spouse who has elected NOT to treat the inherited IRA as his own IRA.

Other than the trustee-to-trustee transfer, an inherited IRA is not permitted to be rolled over – in other words, a non-spouse rollover (the 60-day variety) is not allowed.

On top of the distinction between a spouse and a non-spouse, there is a new distinction as well: between an Eligible Designated Beneficiary and a designated beneficiary.

There are five types of individuals who make up the group of eligible designated beneficiaries. The five are:

• Spouse beneficiaries
• Minor child (of the original owner) beneficiaries
• Disabled beneficiaries
• Chronically Ill beneficiary
• Beneficiary who is not more than 10 years younger than the original owner

Each of these beneficiary classes has the option of using the old-style of required distribution, utilizing the individual beneficiary’s own lifetime as the period over which to distribute the account.

If you are a beneficiary who doesn’t fit into the groups above, you are considered a designated beneficiary.

Restrictions for all non-spouse Eligible Designated Beneficiaries (EDB)

First of all, you are not allowed to treat the IRA as your own – in other words, the account can only be re-titled as an inherited IRA.  This means that you can move the account to another custodian (via trustee-to-trustee transfer only) or leave it at the same custodian, and change the title to read as “John Doe IRA (Deceased January 1, 2009) FBO Janie Brown” or something very similar.

In addition to the restriction on titling, the Eligible Designated Beneficiary must begin taking Required Minimum Distributions (RMD) as described below:

• If the owner of the account died on or after his Required Beginning Date, which is generally April 1 of the year following the year in which he reached age 72 (70½ under 2019 and earlier rules), the RMD is based on the longer of: 1) the owner’s life expectancy¹; 2) the beneficiary’s life expectancy¹; 3) the oldest of multiple beneficiaries’ life expectancy¹ (if there are more than one beneficiary).
• If the owner of the account died before his Required Beginning Date, the RMD is based upon the Eligible Designated Beneficiary’s life expectancy¹ or the life expectancy¹ of the oldest Eligible Designated Beneficiary if there are more than one.

The Designated Beneficiary

Other designated beneficiaries (not the EDB kind) also have the titling restriction, the same as all other non-spouse beneficiaries. In addition to the restriction on titling, the IRA beneficiary must take complete distribution of the IRA proceeds within 10 years, beginning with the year following the year of the death of the original owner.

The designated beneficiary is generally determined on September 30 of the year following the year of the death of the plan owner. In order to be named the designated beneficiary, an individual must be named on the plan documents as of the date of death (no changes can be made after death). If any person who is named the beneficiary in the plan documents is no longer a beneficiary as of September 30 of the year following the year of death, such person will not be considered as a possible designated beneficiary. This could come about if one of the original beneficiaries chose to disclaim entitlement to the account.

If an individual who is the primary beneficiary as of the owner’s date of death dies prior to September 30 of the year following the year of death, this individual is still considered to be the primary beneficiary, rather than any contingent beneficiaries. The deceased beneficiary’s estate would receive the account and his or her age would be used for determining distribution.

If the account is split (as described in the article about splitting inherited IRAs), each beneficiary of the inherited account(s) will be considered the designated beneficiary of that split account. This applies if the account has been split before December 31 of the year following the year of death of the original owner.

Distribution Rules for the non-EDB

It is important to note, the following rules apply as you take full distribution within the required 10 years:

• you’re allowed to spread the distribution out in monthly, quarterly, annually, or any schedule of payments as long as the account is fully distributed by the end of the tenth year following the year of the death of the original owner;
• if you are the beneficiary of more than one IRA, you must determine distribution timeline for each inherited IRA individually;
• there is no annual RMD for inherited IRAs (unless inherited by an EDB), only the 10-year complete distribution rule.

Footnotes:

¹ Life expectancy is generally determined in these cases by the IRS Single Life Table, also known as Table I, which you can find by clicking this link.