Let's say that someone who is not your spouse recently died and named you as their IRA beneficiary. You now have what the IRS calls an “inherited IRA.” It's also sometimes called a beneficiary IRA. You may want to move that inherited IRA money elsewhere for a variety of reasons. Perhaps you want to invest that money in other assets or securities that aren’t offered by the current financial institution. Or maybe the inherited IRA is at a company that has high fees, or is located too far away from where you live. Lastly, you may have your own investment advisor that is recommending that you transfer the IRA funds elsewhere. Whatever the reason, you have to be really careful when moving inherited IRA money. If it’s not done correctly, the entire IRA will be deemed paid out and taxed.
As a non-spouse beneficiary, the only way you can move the inherited IRA money to another inherited IRA is by way of a direct transfer. In a transfer, or trustee-to-trustee transfer, you don’t have use or control of the money. The IRA check from the custodian is not made payable to you personally, but instead is made payable to the new financial institution, for benefit of the inherited IRA. For example, if you are transferring an inherited IRA to financial institution ABC, the check would be made payable to “Institution ABC, for benefit of John Doe, beneficiary of Sam Smith IRA” or something similar. Also, you can never transfer inherited IRA money to your own IRA; only to another inherited IRA of the same type. For example, if you inherited a Roth IRA, it must be transferred to another inherited Roth IRA, not an inherited Traditional IRA.
As a non-spouse beneficiary, you are not allowed move the funds via a 60-day rollover to an inherited IRA or to an IRA in your own name. If you attempt to roll over the funds within 60-days (i.e., you have control or use for the money), the entire IRA distribution is immediately taxable. Also be wary of an IRA custodian that will only make a check payable to you, the beneficiary. There is no way to fix this problem once you take control of the money (e.g., the IRA check is made payable to you personally). So before you decide to move inherited IRA funds to another financial institution, make sure you do it as a transfer directly to another inherited IRA.
- If you want to move inherited IRA money to a different financial institution, you must do it as a transfer; NOT a rollover
- Non-spouse beneficiaries can never more inherited IRA money via a 60-day IRA rollover