When you inherit an IRA, you might be puzzled about what to do with it. One of your options is to transfer the inherited IRA to a new custodian. Remember, a custodian is a special bank, credit union, or nondepository bank that executes asset directions from IRA owners and performs “the many custodial and administrative duties that are necessary to preserve the tax-deferred status of an IRA,” the Retirement Industry Trust Association explains.
Learn more about what an inherited IRA is, what you need to do to transfer it to a new custodian, and why you might want to transfer it (as well as information about how to set up a self-directed IRA).
First, What Is an Inherited IRA?
An inherited IRA, also known as a beneficiary IRA, is a retirement account that you open when you inherit an IRA or a 401(k) following the account owner’s death. Typically, the beneficiary must transfer the assets from the deceased owner’s account to a new IRA bearing the beneficiary’s name.
Any type of IRA can be converted into an inherited IRA, including traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs. The tax status of the inherited IRA remains the same as the status of the original IRA. An IRA created with pretax dollars (like a traditional IRA) is treated the same from a tax perspective when it becomes an inherited IRA.
If someone inherits an IRA, they can also opt to cash out the account and receive a lump-sum payment. Contributions to an inherited IRA aren’t allowed.
Talk to your financial planner, accountant, or estate attorney who’s well-versed in IRA rules before making any moves, though. The Secure Act of 2019 instituted new rules for inherited IRAs. For IRAs inherited on January 1, 2020, or after, the new law “requires some heirs to deplete accounts within 10 years, and they may owe levies on distributions, known as the ‘10-year rule,’” CNBC reports. There are exceptions to this rule, however, so be sure to speak with your trusted financial advisor.
Can You Transfer an Inherited IRA to a New Custodian?
Yes, you can transfer an inherited IRA to a new custodian, such as a brokerage firm or a bank. You must perform the transfer through what’s known as a trustee-to-trustee transfer.
If you inherit an IRA from a spouse, you can:
- treat it as your own IRA by designating yourself as the account owner;
- treat it as your own IRA by rolling it over into a traditional IRA, workplace retirement plan, or annuity plan; or
- treat yourself as a beneficiary rather than treating the IRA as your own.
However, suppose the inherited IRA goes to a beneficiary who isn’t the original owner’s spouse. In that case, the beneficiary generally must withdraw all assets from the inherited IRA within 10 years of the original owner’s death.
If you want to move an inherited IRA from one custodian to another, you can do it through a direct trustee-to-trustee transfer. Most inherited IRAs are opened by non-spouse beneficiaries.
Transferring a traditional IRA from one custodian to a traditional IRA at another custodian can be done without tax implications. However, if you’re moving a traditional IRA from one custodian and converting it into a Roth IRA at another custodian, you’ll be hit with a tax bill. That’s because the transferred money is treated as taxable income.
Keep in mind that a beneficiary can make a trustee-to-trustee transfer only as long as the IRA into which money is being moved is established and maintained in the name of the deceased IRA owner for the beneficiary’s benefit.
What Do You Need to Set Up an Inherited IRA?
Some of the information a custodian will need to open an inherited IRA for you is:
- Social Security number
- driver’s license number
- employer’s name and address (if you’re employed)
- copy of original IRA owner’s death certificate
Why Would You Want to Transfer an Inherited IRA to a New Custodian?
Transferring an inherited IRA to a new custodian might be done for several reasons. These include:
- lower fees charged by the new custodian
- consolidation of retirement accounts to a single custodian
- better options from the new custodian for growing and diversifying your assets
- the ability to set up a self-directed IRA, enabling the purchase of traditional assets like stocks and alternative assets like gold and other precious metals
If you’re wondering how to incorporate precious metals into your retirement plans, U.S. Money Reserve can help. Download a free Gold IRA Information Kit and call to speak with a knowledgeable IRA Account Executive.
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