Roll over the interest of an inherited IRA or retirement plan

REGION – If your spouse dies and you are a primary beneficiary of their traditional IRA or retirement plan account, you may be able to roll over the inherited funds to your own traditional IRA or plan account. This option is available only to surviving spouse beneficiaries. If you are a child of the deceased or any other type of beneficiary, you cannot do a rollover.

The rollover option allows the inherited funds to continue to grow tax-deferred in the new IRA or plan. If you exercise this option, you generally have the choice of doing either a direct rollover or an indirect rollover.

Are there any restrictions on the spousal rollover option?

You may be able to roll over the inherited funds to your own traditional IRA or plan. However, you cannot roll over RMD amounts.

In the case of post-death distributions from a retirement plan account, the plan may specify the distribution options available. Those options may or may not be identical to the allowable options set forth in the IRS distribution rules. You should consult the administrator of the retirement plan for details regarding options available to you. 

A rollover is not a taxable distribution

In general, distributions from inherited traditional IRAs and retirement plans are included in the beneficiary’s taxable income for federal income tax purposes. However, a rollover of the inherited funds to your own IRA is generally treated as a tax-free transfer of assets. Assuming that the rollover is done properly and in a timely manner, you will not be considered to have taken a taxable distribution from the inherited IRA or plan. Once the rollover to your own IRA or plan is complete, distributions that you take from that account will be fully or partially taxable.

You may be able to defer taking distributions

If you elect the spousal rollover option, the inherited funds will be moved to your own IRA or plan account. This is significant because as the owner of the new account, you do not have to begin taking distributions of the inherited funds until your own required beginning date. This would allow you to defer income tax liability on the funds and to maximize the funds’ tax-deferred growth potential.

The funds continue to grow tax-deferred

A rollover is a transfer of assets from one tax-deferred retirement savings vehicle to another. If you are under age 70.5, the full amount of the inherited funds will be able to grow tax deferred until you begin taking distributions from your own IRA or plan account. Even if you must begin taking distributions immediately, those distributions can generally be spread over a period of years, allowing the balance of the funds to grow tax-deferred until distributed.

You can choose beneficiaries for your own IRA or plan account

As an IRA or plan account owner, you have certain rights, including the right to name one or more beneficiaries of your choice. Your options when choosing IRA or plan beneficiaries generally include your children, your grandchildren, other relatives or friends, a trust for the benefit of your loved ones, a charity, or your estate. These are the individuals or entities that will receive the IRA or plan funds after your death. The ability to choose your own beneficiaries can be a significant advantage in terms of your estate planning.

Disadvantages of the spousal rollover option

One potential drawback of the rollover option is that distributions from your own IRA or plan account may be subject to the 10% early withdrawal penalty if you are under age 59.5. By contrast, distributions of the inherited funds from your late spouse’s IRA or plan account to you as beneficiary of that account would not be subject to this penalty, regardless of your age. In addition, there may be rare cases in which taking post-death distributions under another method can provide greater income tax deferral than the rollover option. Consult a tax advisor for more information.

Choose between a direct and an indirect rollover

Your first step is to decide on the type of rollover. A direct rollover generally makes more sense because it is more streamlined and less risky. An indirect rollover involves an extra step. In the case of an inherited retirement plan account, the distributed funds will be subject to a 20% mandatory withholding for federal income tax. 

Choose the rollover account

If you have more than one retirement account, you must choose the account that you would like to receive the rolled over funds. If you do not currently have your own retirement account to receive the inherited funds, you can generally establish a traditional IRA for this purpose. Traditional IRAs can be established with banks, mutual fund companies, and other financial institutions.

Submit the necessary form to the IRA custodian or plan administrator

You will need to contact the IRA custodian or plan administrator to request the necessary form for a rollover. Return the form with any necessary documentation indicating that you want to roll over the inherited funds to your own IRA or plan account.

Make sure the new trustee receives the funds within 60 days

If you fail to complete an indirect rollover within 60 days of the date on the check, you may have effectively changed your rollover into a lump-sum distribution. This would cause all or a portion of the funds to be included in your taxable income for federal income tax purposes. However, there are several ways to seek waiver of the 60-day deadline.

Written by Huntley Financial Services. For more information, contact Mark Huntley at 888-922-1035.

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