Transferring Funds
So, if a spouse is going to move the inherited IRA to their own IRA, they can move it over in this manner. Non-spouses do not qualify for the 60-day rollover.
There are a few things you can do to avoid paying taxes on an inherited IRA. The most obvious thing is to not take a lump-sum distribution. If you inherit the IRA from your spouse, wait until the required minimum distributions begin or take distributions based on your own life expectancy.
Before the Secure Act of 2019, heirs could "stretch" inherited IRA withdrawals over their lifetime, which helped reduce yearly taxes. But certain accounts inherited since 2020 are subject to the "10-year rule," meaning IRAs must be empty by the 10th year following the original account owner's death.
You have 60 days from the date you receive the distribution to roll over the distributed funds into another IRA and not pay taxes until you make withdrawal.
You can withdraw money any time after age 59½, but you'll need to pay income taxes on part or all of any IRA withdrawals you make.
The 60-day rollover period starts the date you receive a distribution from your retirement plan or IRA. If you miss the deadline, you may not be allowed to make your rollover contribution unless you qualify for a waiver. Without a waiver, the distribution counts as taxable income for that year.
Spacing out distributions over 10-year period
A beneficiary may consider spacing out distributions over the ten-year period to benefit from tax-deferred appreciation while also managing taxes. If the beneficiary retires during those years, waiting to take distributions until then may lower the overall tax bill.
The July 19, 2024, regulations specify that if the account holder was taking required minimum distributions (RMDs) at the time of their death, the beneficiary must continue to take annual RMDs based on the deceased's schedule until the end of the 10-year period.
The 10-year rule requires that all assets in the inherited IRA must be fully withdrawn by the end of the 10th year following the original IRA owner's death. (If the death occurred in 2019 or earlier, the 10-year rule was a five-year rule.)
Transfer the funds into your own IRA
If your spouse lists you as beneficiary, you have the option to roll over the funds to your own IRA where the money can potentially continue to grow tax-free.
If you wish to withdraw your earnings from a Roth IRA without paying taxes, you must be 59½ and must have held the Roth IRA for at least five years. Exceptions to these requirements include: Becoming disabled and needing the funds to live on. Needing Roth funds of up to $10,000 to buy your first home.
An inherited IRA may be taxable, depending on the type. If you inherit a Roth IRA, you're free of taxes. But with a traditional IRA, any amount you withdraw is subject to ordinary income taxes.
Considerations for inherited IRAs received since 2020: Tax implications will depend on the type of account you've inherited. The IRA balance must be emptied within 10 years; this distribution period begins the year after the original account owner's death.
When you start withdrawing from your account at retirement age, you will pay taxes on the funds you take out. With a Roth IRA, you contribute to your IRA after you've paid taxes for the year; and when you make withdrawals at retirement age, you don't pay any taxes on the funds you take out.
The short answer is yes if you inherit the IRA from a spouse. But a rollover to your own IRA is not allowed if you inherit the IRA from anyone else.
Five-year rule
Any individual beneficiary may elect to distribute the inherited IRA assets over the five years following the owner's death. The distribution must be completed by the end of the year containing the fifth anniversary of the owner's death.
There is no age limit. There are no income limitations to contribute to a non-deductible Traditional IRA, and the maximum contribution per year is $7,000 for tax years 2024 - 2025 ($8,000 if you're age 50 or over).
As a nonspouse beneficiary inheriting an IRA from a parent, you have two options: You either can withdraw the account as a lump sum, transfer it into an inherited IRA in your name or do a combination of the two.
So, when the IRS waived RMDs from inherited IRAs for 2024—for the fourth year in a row—it purportedly did inherited IRA owners a favor.
One inherited IRA tax management tip is to avoid immediately withdrawing a single lump sum from the IRA. Instead, wait until RMDs are due, or, if you got the IRA from a non-spouse, stretch withdrawals over 10 years. RMDs are taxable and can change your tax bracket and increase your overall tax burden.
If you are the designated nonspouse beneficiary, you can only roll over the inherited plan account into an inherited IRA (either traditional or Roth). The significance of an inherited IRA is that you can't make any contributions to it or make rollovers either to it or from it.
You may also owe the 10% early distribution penalty if you're under age 59½. However, the IRS can waive the 60-day rule if two conditions are met: You suffer a casualty, disaster or other event that's beyond your reasonable control. It would be unfair for the IRS not to waive the 60-day rule.
An IRA is a tax-advantaged retirement account with special provisions for rolling over funds. These rules apply to those under age 59½. While not officially recognized as an IRA loan, you are allowed to borrow from your IRA for 60 days without paying income taxes or the 10% early withdrawal penalty.
To qualify for the 60-day rule, the two accounts must be the same type of IRA – Roth or traditional IRA. The original custodian will send a tax form called a 1099-R, which you will file with your yearly income taxes. The custodian will also submit a Form 5498 to the IRS showing the contributed/transferred amount.