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When You Inherit An IRA Or You Are A Beneficiary 
 
by kmhagen September 16, 2005

IRA Inherited from Someone Other than Your Spouse

If you inherit an IRA from someone other than your spouse, you cannot treat the IRA as your own.  You cannot make contributions to the IRA, or make any rollovers into or out of it.  But, you may be able to transfer the balance in the IRA, as a trustee-to-trustee transfer, to another IRA.  You can do this provided the IRA to which you are transferring the balance was set up and maintained in the name of the deceased IRA owner for your benefit as the beneficiary of the IRA.  You cannot transfer the balance to an IRA set up in your own name.

As the beneficiary of the IRA in this case, you will not owe any taxes on the assets in the IRA account or on the accumulated earnings until you take a distribution from the IRA.  You must start to receive distributions from the IRA according to the distribution rules that apply to beneficiaries, as indicated below under “Required Distributions”.

Basis in an Inherited IRA

If the owner had a cost basis in the IRA as a result of non-deductible contributions made to the account, this basis will remain with the IRA.  If you are the decedent’s surviving spouse and you choose to treat the inherited IRA as your own, you can combine this basis with any basis you may have in your own IRA.  But if you are not the surviving spouse, you cannot combine the basis of the inherited IRA with the basis in your own IRA or any other IRA you inherit.  If you are a beneficiary and you take distributions from both an inherited IRA and from your own IRA(s), you must calculate the taxable and non-taxable portions of the distributions separately, using a separate Form 8606, Nondeductible IRAs, for each.

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