Retirement tips: How to transfer inherited IRA

How to Transfer Inherited IRA

An inherited IRA is a retirement account that you receive when you become the beneficiary of someone else’s IRA. After someone close to you, such as a family member or friend, has passed away, you might inherit his or her IRA, and your transfer options will depend upon your relationship to the deceased.

How to Transfer Inherited IRA from Your Spouse

When you receive an IRA from a deceased spouse, the rules are a lot easier because you can treat the account as if it were yours from the start. If you are the sole beneficiary, you have the ability to move the funds as you choose, and that includes moving it right into your personal IRA if you already have one, or moving the money into a new IRA. The distribution rules remain the same, and the IRA is treated as though it had always been your account, so the assets could keep growing.

If you take the spousal transfer route and you make withdrawals before you reach the age of 59½, you will incur a penalty, unless you qualify for an exemption. However, if your spouse had already reached the age of 70½ prior to his or her death, you will have to take the Required Minimum Distribution, or RMD, for the year in which he or she died, provided that the money was not already taken, even if you are not 59½ or older.  

In the event that you do not want to transfer the funds into your own IRA, you can instead take a lump sum distribution payment. You can do so whether your deceased spouse was under or over 70½ years of age. Essentially, all of the assets within the IRA will be given to you, and the money will be made available all at once. You will, however, have to pay the appropriate amount of taxes on that distribution, as the money will be considered income. Taking out the money at once also means that you might even end up moving yourself into a higher tax bracket compared to your existing income, and that will cause your income taxes to go up. The good news, though, is that you will not have to pay an early withdrawal fee.  

Inheriting your spouse’s IRA before he or she turned 70½ years old also means that you have the ability to postpone the minimum distributions until the time that your spouse would have been that age. And if you transfer the funds into your IRA, you can postpone distributions until you are 70½ years old.

How to Transfer a Non-Spouse Inherited IRA

In the event that you are the beneficiary of an IRA but you were not married to the deceased, you will not be able to simply combine the IRA’s funds with your own IRA. This complicates things a bit, but you can still manage to navigate the transfer of the funds quite easily.

Your first option is to transfer the funds into an Inherited IRA account. You will have to change the title of the account so that it reflects the name of the deceased, the fact that the account is an inherited IRA, and the fact that you are the beneficiary. You will then begin receiving the Required Minimum Distributions, and those can be stretched out over your life. In the meantime, the account could keep growing tax-deferred. However, you will have to receive the Required Minimum Distributions every year, regardless of how old you are when you end up opening this type of account. And if you are opening an Inherited Traditional IRA, you should expect to pay taxes on the distributions that you receive, but if you have an Inherited Roth IRA, you may not have to pay taxes on the distributions.  

When you are the beneficiary of a non-spouse IRA, you also have the option of taking a lump sum distribution if you do not wish to transfer the funds. The same rules that are applied to spouses will be applied to you. This means that you will receive the money all at once and pay taxes on it, while avoiding the early withdrawal penalty. You will also need to consider if that extra income takes you into a new income tax bracket.

Another option would be to simply disclaim the assets within the IRA that you have inherited. You might decide to take this route if the amount in the IRA isn’t large enough to justify the steps necessary to transfer the account, or you might want to avoid the inheritance tax in the form of an income tax that comes with taking a lump sum distribution. If you choose this option, you can decline to accept a part of the IRA, or you can reject it entirely. You can also have the IRA go to another beneficiary, or multiple beneficiaries, by giving up your share of it. In the event that there aren’t any other beneficiaries, the IRA’s assets will go to the owner’s spouse before going to the owner’s estate. But you need to make this decision within nine months, and this choice will be irrevocable.

study abroad
study abroad

How to Transfer Your Inherited IRA Internationally

After inheriting an IRA and going through the process of setting up your Inherited IRA account, whether you are the deceased’s spouse or not, you might decide to move abroad someday. And if you do decide to start a new life in another country, you can rest assured that your pension will go with you when you use a service like OFX to stretch your money even further.

With OFX, you can receive international pension payments at the best exchange rates, and regular payments will ensure you receive your funds on a consistent basis so you can focus on enjoying life in retirement rather than worrying about your IRA.  

A Few Final Tips to Make the Process Go Smoothly

  • If you are one of multiple beneficiaries of an IRA, you can split the account into several separate IRA accounts and have one for every beneficiary. In this way, you can avoid any disputes, and the youngest individual will be able to stretch out the distributions over a longer period of time as well.
  • In the event that there are also secondary beneficiaries involved, you could disclaim the amount that you inherited, allowing it to simply pass right to those secondary beneficiaries. In this way, you can minimise any income or estate taxes that you would otherwise have to pay and you can avoid creditors.
  • Remember: if the account’s owner was 70½ years old or older, you can get in touch with the bank that is holding the Traditional IRA or the 401(k). Then you can receive the minimum distribution that is required for the year in which the individual died, provided that they had not done so prior to their death.

Consider Working with a Financial Advisor

As you can see, inherited IRAs, and the steps that you need to take to properly transfer the funds, can be complicated and confusing. If you have inherited an IRA, working with a financial advisor will allow you to have all of your questions answered, so you can make the best decisions for your financial future.


IMPORTANT: The contents of this blog do not constitute financial advice and are provided for general information purposes only without taking into account the investment objectives, financial situation and particular needs of any particular person. OzForex Limited (trading as OFX) and its affiliated entities make no recommendation as to the merits of any financial strategy or product referred to in the blog. OFX makes no warranty, express or implied, concerning the suitability, completeness, quality or exactness of the information and models provided in this blog.