What If I Inherit an IRA?

If you inherit a traditional IRA, it is subject to special rules.

Inherited from spouse. If you inherit a traditional IRA from your spouse, you generally have the following choices. You can:

1. Treat it as your own by designating yourself as the account owner.
2. Treat it as your own by rolling it over into your traditional IRA, or to the extent it is taxable, into a:
   1. Qualified employer plan,
   2. Qualified employee annuity (section 403(a) plan),
   3. Tax-sheltered annuity (section 403(b) plan),
   4. Deferred compensation plan of your state or local government (section 457 plan), or
3. Treat yourself as the beneficiary rather than treating the IRA as your own.

You will be considered to have chosen to treat it as your own if:

• Contributions (including rollover contributions) are made to the inherited IRA, or
• You do not take the required minimum distribution for a year as a beneficiary of the IRA.

You will only be considered to have chosen to treat it as your own if:

• You are the sole beneficiary of the IRA,
• You have an unlimited right to withdraw amounts from it, and
• The distribution of the required minimum amount for the account for the calendar year of the decedent's death has been made.

However, if you receive a distribution from your deceased spouse's IRA, you can roll that distribution over into your own IRA within the 60-day time limit, as long as the distribution is not a required distribution, even if you are not the sole beneficiary of your deceased spouse's IRA.

Inherited from someone other than spouse. If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. This means that contributions (including rollover contributions) cannot be made to the IRA and you cannot roll over any amounts out of the inherited IRA. But, like the original owner, you generally will not owe tax on the assets in the IRA until you receive distributions from it. You must begin receiving distributions from the IRA under the rules for distributions that apply to beneficiaries.

More information. For more information about rollovers, required distributions, and inherited IRAs, see:

• Rollovers, later in this chapter under Can I Move Retirement Plan Assets,
• When Must I Withdraw IRA Assets? (Required Distributions), later in this chapter, and
• The discussion of beneficiaries later in this chapter under When Must I Withdraw IRA Assets? (Required Distributions), and the discussion of inherited IRAs under Are Distributions Taxable.

Can I Move Retirement
Plan Assets?

Traditional IRA rules permit you to transfer, tax free, assets (money or property) from other retirement programs (including traditional IRAs) to a traditional IRA. The rules permit the following kinds of transfers.

• Transfers from one trustee to another.
• Rollovers.
• Transfers incident to a divorce.

This chapter discusses all three kinds of transfers. Transfers to Roth IRAs. Under certain conditions, you can move assets from a traditional IRA to a Roth IRA. For more information about these transfers, see the discussion at Can I Move Amounts Into a Roth IRA? in chapter 2.

Trustee-to-Trustee Transfer

A transfer of funds in your traditional IRA from one trustee directly to another, either at your request or at the trustee's request, is not a rollover. Because there is no distribution to you, the transfer is tax free. Because it is not a rollover, it is not affected by the 1-year waiting period required between rollovers. This waiting period is discussed later under Rollover From One IRA Into Another.

For information about direct transfers from retirement programs other than traditional IRAs, see Direct rollover option, later in this chapter.

Rollovers

Generally, a rollover is a tax-free distribution to you of cash or other assets from one retirement plan that you contribute to another retirement plan. The contribution to the second retirement plan is called a rollover contribution.

Note. The amount you roll over tax free is generally taxable when the new plan distributes that amount to you or your beneficiary.

Kinds of rollovers to a traditional IRA. You can roll over amounts from the following plans into a traditional IRA:

1. A traditional IRA,
2. An employer's qualified retirement plan for its employees,
3. A deferred compensation plan of a state or local government (section 457 plan), or
4. A tax-sheltered annuity (section 403 plan).

Treatment of rollovers. You cannot deduct a rollover contribution, but you must report the rollover distribution on your tax return as discussed later under Reporting rollovers from IRAs and Reporting rollovers from employer plans.

Rollover notice. A written explanation of rollover treatment must be given to you by the plan (other than an IRA) making the distribution.

Kinds of rollovers from a traditional IRA. You may be able to roll over, tax free, a distribution from your traditional IRA into a qualified plan, including the Federal Thrift Savings Fund, a deferred compensation plan of a state or local government (section 457 plan), and a tax-sheltered annuity (section 403(b) plan). The part of the distribution that you can roll over is the part that would otherwise be taxable (includible in your income). Qualified plans may, but are not required to, accept such rollovers.

Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA. If you roll over a distribution from an IRA into an eligible retirement plan other than an IRA, the part of the distribution you roll over is considered to come first from amounts other than after-tax contributions in any of your traditional IRAs. This means that you can roll over a distribution from an IRA with nontaxable income into a qualified plan if you have enough taxable income in your other IRAs to cover the nontaxable part. The effect of this is to make the amount in your traditional IRAs that you can roll over to a qualified plan as large as possible.

Filled-in Worksheet 1-2. Example 1 of Figuring Your Reduced IRA Deduction for 2002 (Use only if you or your spouse is covered by an employer plan and your modified AGI falls between the two amounts shown below for your coverage situation and filing status.) Note. If you were married and both you and your spouse contributed to IRAs, figure your deduction and your spouse's deduction separately.

	IF you...	AND your filing status is...	AND your modified AGI is over...	THEN enter on line 1 below...
	are covered by an employer plan	single or head of household	$34,000	$44,000
		married filing jointly or qualifying widow(er)	$54,000	$64,000
		married filing separately	$0	$10,000
	are not covered by an employer plan, but your spouse is covered	married filing jointly	$150,000	$160,000
		married filing separately	$0	$10,000
1.	Enter applicable amount from table above				$64,000
2.	Enter your modified AGI (that of both spouses, if married filing jointly)				$58,555
	Note. If line 2 is equal to or more than the amount on line 1. STOP HERE. Your IRA contributions are not deductible. See Nondeductible Contributions.
3.	Subtract line 2 from 1. If line 3 is $10,000 or more, STOP HERE. You can take a full IRA deduction for contributions of up to $3,000 ($3,500 if 50 or older) or 100% of your (and if married filing jointly, your spouse's) compensation, whichever is less				$5,445
4.	Multiply line 3 by 30% (.30) (by 35% (.35) if age 50 or older at the end of 2002). If the result is not a multiple of $10, round it to the next highest multiple of $10. (For example, $611.40 is rounded to $620.) However, if the result is less than $200, enter $200				$1,640
5.	Enter your compensation minus any deductions on Form 1040, line 29 (one-half of self-employment tax) and line 31(self-employed SEP, SIMPLE, and qualified plans). If you are filing a joint return and your compensation is less than your spouse's, include your spouse's compensation reduced by his or her traditional IRA and Roth IRA contributions for this year. If you file Form 1040, do not reduce your compensation by any losses from self-employment				$40,000
6.	Enter contributions made, or to be made, to your IRA for 2002 but do not enter more than $3,000 ($3,500 if 50 or older). If contributions are more than $3,000 ($3,500 if 50 or older), see Excess Contributions, later.				$3,000
7.	IRA deduction. Compare lines 4, 5, and 6. Enter the smallest amount (or a smaller amount if you choose) here and on the Form 1040 or 1040A line for your IRA, whichever applies. If line 6 is more than line 7 and you want to make a nondeductible contribution, go to line 8				$1,640
8.	Nondeductible contribution. Subtract line 7 from line 5 or 6, whichever is smaller. Enter the result here and on line 1 of your Form 8606				$1,360

Filled-in Worksheet 1-2. Example 2 of Figuring Your Reduced IRA Deduction for 2002 (Use only if you or your spouse is covered by an employer plan and your modified AGI falls between the two amounts shown below for your coverage situation and filing status.) Note. If you were married and both you and your spouse contributed to IRAs, figure your deduction and your spouse's deduction separately.

	IF you ...	AND your filing status is ...	AND your modified AGI is over ...	THEN enter on line 1 below...
	are covered by an employer plan	single or head of household	$34,000	$44,000
		married filing jointly or qualifying widow(er)	$54,000	$64,000
		married filing separately	$0	$10,000
	are not covered by an employer plan, but your spouse is covered	married filing jointly	$150,000	$160,000
		married filing separately	$0	$10,000
1.	Enter applicable amount from table above				$160,000
2.	Enter your modified AGI (that of both spouses, if married filing jointly)				$156,555
	Note. If line 2 is equal to or more than the amount on line 1. STOP HERE. Your IRA contributions are not deductible. See Nondeductible Contributions.
3.	Subtract line 2 from 1. If line 3 is $10,000 or more, STOP HERE. You can take a full IRA deduction for contributions of up to $3,000 ($3,500 if 50 or older) or 100% of your (and if married filing jointly, your spouse's) compensation, whichever is less				$3,445
4.	Multiply line 3 by 30% (.30) (by 35% (.35) if age 50 or older at the end of 2002). If the result is not a multiple of $10, round it to the next highest multiple of $10. (For example, $611.40 is rounded to $620.) However, if the result is less than $200, enter $200				$1,040
5.	Enter your compensation minus any deductions on Form 1040, line 29 (one-half of self-employment tax) and line 31(self-employed SEP, SIMPLE, and qualified plans). If you are filing a joint return and your compensation is less than your spouse's, include your spouse's compensation reduced by his or her traditional IRA and Roth IRA contributions for this year. If you file Form 1040, do not reduce your compensation by any losses from self-employment				$38,000
6.	Enter contributions made, or to be made, to your IRA for 2002 but do not enter more than $3,000 ($3,500 if 50 or older). If contributions are more than $3,000 ($3,500 if 50 or older), see Excess Contributions, later.				$3,000
7.	IRA deduction. Compare lines 4, 5, and 6. Enter the smallest amount (or a smaller amount if you choose) here and on the Form 1040 or 1040A line for your IRA, whichever applies. If line 6 is more than line 7 and you want to make a nondeductible contribution, go to line 8				$1,040
8.	Nondeductible contribution. Subtract line 7 from line 5 or 6, whichever is smaller. Enter the result here and on line 1 of your Form 8606				$1,960

Time Limit for Making
a Rollover Contribution

You generally must make the rollover contribution by the 60th day after the day you receive the distribution from your traditional IRA or your employer's plan. However, see Extension of rollover period, later.

The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control.

Rollovers completed after the 60-day period. In the absence of a waiver, amounts not rolled over within the 60-day period do not qualify for tax-free rollover treatment. You must treat them as a taxable distribution from either your IRA or your employer's plan. These amounts are taxable in the year distributed, even if the 60-day period expires in the next year. You may also have to pay a 10% tax on early distributions as discussed later under Early Distributions.

Unless there is a waiver or an extension of the 60-day rollover period, any contribution you make to your IRA more than 60 days after the distribution is a regular contribution, not a rollover contribution.

Extension of rollover period. If an amount distributed to you from a traditional IRA or a qualified employer retirement plan is a frozen deposit at any time during the 60-day period allowed for a rollover, two special rules extend the rollover period.

1. The period during which the amount is a frozen deposit is not counted in the 60-day period.
2. The 60-day period cannot end earlier than 10 days after the deposit is no longer frozen.

Frozen deposit. This is any deposit that cannot be withdrawn from a financial institution because of either of the following reasons.

1. The financial institution is bankrupt or insolvent.
2. The state where the institution is located restricts withdrawals because one or more financial institutions in the state are (or are about to be) bankrupt or insolvent.

Rollover From One IRA Into Another

You can withdraw, tax free, all or part of the assets from one traditional IRA if you reinvest them within 60 days in the same or another traditional IRA. Because this is a rollover, you cannot deduct the amount that you reinvest in an IRA.

You may be able to treat a contribution made to one type of IRA as having been made to a different type of IRA. This is called recharacterizing the contribution. See Recharacterizations in chapter 2 for more information.

Waiting period between rollovers. If you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover.

The 1-year period begins on the date you receive the IRA distribution, not on the date you roll it over into an IRA.

Example. If you have two traditional IRAs, IRA-1 and IRA-2, and you make a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3), you can also make a tax-free rollover of a distribution from IRA-2 into IRA-3 (or into any other traditional IRA) within 1 year of the distribution from IRA-1. These can both be tax-free rollovers because you have not received more than one distribution from either IRA within 1 year. However, you cannot, within the 1-year period, make a tax-free rollover of any distribution from IRA-3 into another traditional IRA.

Exception. There is an exception to the rule that amounts rolled over tax free into an IRA cannot be rolled over tax free again within the 1-year period beginning on the date of the original distribution. The exception applies to a distribution which meets all three of the following requirements.

1. It is made from a failed financial institution by the Federal Deposit Insurance Corporation (FDIC) as receiver for the institution.
2. It was not initiated by either the custodial institution or the depositor.
3. It was made because:
   1. The custodial institution is insolvent, and
   2. The receiver is unable to find a buyer for the institution.

The same property must be rolled over. If property is distributed to you from an IRA and you complete the rollover by contributing property to an IRA, your rollover is tax free only if the property you contribute is the same property that was distributed to you.

Partial rollovers. If you withdraw assets from a traditional IRA, you can roll over part of the withdrawal tax free and keep the rest of it. The amount you keep will generally be taxable (except for the part that is a return of nondeductible contributions) and may be subject to the 10% tax on early distributions discussed later under What Acts Result in Penalties or Additional Taxes.

Required distributions. Amounts that must be distributed during a particular year under the required distribution rules (discussed later) are not eligible for rollover treatment.

Inherited IRAs. If you inherit a traditional IRA from your spouse, you generally can roll it over, or you can choose to make the inherited IRA your own as discussed earlier. See What If I Inherit an IRA, earlier.

Not inherited from spouse. If you inherited a traditional IRA from someone other than your spouse, you cannot roll it over or allow it to receive a rollover contribution. You must withdraw the IRA assets within a certain period. For more information, see When Must I Withdraw IRA Assets, later.

Reporting rollovers from IRAs. Report any rollover from one traditional IRA to the same or another traditional IRA on lines 15a and 15b of Form 1040 or on lines 11a and 11b of Form 1040A.

Enter the total amount of the distribution on line 15a of Form 1040 or on line 11a of Form 1040A. If the total amount on line 15a of Form 1040 or on line 11a of Form 1040A was rolled over, enter zero on line 15b of Form 1040 or on line 11b of Form 1040A. Otherwise, enter the taxable portion of the part that was not rolled over on line 15b of Form 1040 or on line 11b of Form 1040A.

For information on how to figure the taxable portion, see Are Distributions Taxable, later.

Rollover From Employer's Plan
Into an IRA

You can roll over into a traditional IRA all or part of an eligible rollover distribution you receive from your (or your deceased spouse's):

1. Employer's qualified pension, profit-sharing or stock bonus plan,
2. Annuity plan,
3. Tax-sheltered annuity plan (section 403(b) plan), or
4. Governmental deferred compensation plan (section 457 plan).

A qualified plan is one that meets the requirements of the Internal Revenue Code.

Eligible rollover distribution. Generally, an eligible rollover distribution is any distribution of all or part of the balance to your credit in a qualified retirement plan except:

1. A required minimum distribution (explained later under When Must I Withdraw IRA Assets? (Required Distributions)),
2. Hardship distributions, or
3. Any of a series of substantially equal periodic distributions paid at least once a year over:
   1. Your lifetime or life expectancy,
   2. The lifetimes or life expectancies of you and your beneficiary, or
   3. A period of 10 years or more.

Also, see Publication 575 for additional exceptions. Your rollover into a traditional IRA may include both amounts that would be taxable and amounts that would not be taxable if they were distributed to you, but not rolled over. To the extent the distribution is rolled over into a traditional IRA, it is not includible in your income.

Written explanation to recipients. Before making an eligible rollover distribution, the administrator of a qualified employer plan must provide you with a written explanation. It must tell you about all of the following.

• Your right to have the distribution paid tax free directly to a traditional IRA or another eligible retirement plan.
• The requirement to withhold tax from the distribution if it is not paid directly to a traditional IRA or another eligible retirement plan.
• The nontaxability of any part of the distribution that you roll over to a traditional IRA or another eligible retirement plan within 60 days after you receive the distribution.
• Other qualified employer plan rules, if they apply, including those for lump-sum distributions, alternate payees, and cash or deferred arrangements.
• How the plan receiving the distribution differs from the plan making the distribution in its restrictions and tax consequences.

The plan administrator must provide you with this written explanation no earlier than 90 days and no later than 30 days before the distribution is made.

However, you can choose to have a distribution made less than 30 days after the explanation is provided as long as both of the following requirements are met.

1. You are given at least 30 days after the notice is provided to consider whether you want to elect a direct rollover.
2. You are given information that clearly states that you have this 30-day period to make the decision.

Contact the plan administrator if you have any questions regarding this information. Eligible retirement plans. The following are considered eligible retirement plans.

• Individual retirement arrangements (IRAs).
• Qualified trusts.
• Qualified employee annuity plans under section 403(a).
• Deferred compensation plans of state and local governments (section 457 plans).
• Tax-sheltered annuities (section 403(b) annuities).

Withholding requirement. If an eligible rollover distribution is paid directly to you, the payer must withhold 20% of it. This applies even if you plan to roll over the distribution to a traditional IRA. You can avoid withholding by choosing the direct rollover option, discussed later.

Exceptions. The payer does not have to withhold from an eligible rollover distribution paid to you if either of the following conditions apply.

1. The distribution and all previous eligible rollover distributions you received during your tax year from the same plan (or, at the payer's option, from all your employer's plans) total less than $200.
2. The distribution consists solely of employer securities, plus cash of $200 or less in lieu of fractional shares.

The amount withheld is part of the distribution. If you roll over less than the full amount of the distribution, you may have to include in your income the amount you do not roll over. However, you can make up the amount withheld with funds from other sources.

Other withholding rules. The 20% withholding requirement does not apply to distributions that are not eligible rollover distributions. However, other withholding rules apply to these distributions. The rules that apply depend on whether the distribution is a periodic distribution or a nonperiodic distribution that is not an eligible rollover distribution. For either of these distributions, you can still choose not to have tax withheld. For more information, get Publication 575.

Direct rollover option. Your employer's qualified plan must give you the option to have any part of an eligible rollover distribution paid directly to a traditional IRA. The plan is not required to give you this option if your eligible rollover distributions are expected to total less than $200 for the year.

Withholding. If you choose the direct rollover option, no tax is withheld from any part of the designated distribution that is directly paid to the trustee of the traditional IRA.

If any part is paid to you, the payer must withhold 20% of that part's taxable amount.

Choosing the right option. Table 1-5 may help you decide which distribution option to choose. Carefully compare the effects of each option.

Table 1-5. Comparison of Payment to You Versus Direct Rollover

Affected item	Result of a payment to you	Result of a direct rollover
withholding	The payer must withhold 20% of the taxable part.	There is no withholding.
additional tax	If you are under age 59 1/2, a 10% additional tax may apply to the taxable part (including an amount equal to the tax withheld) that is not rolled over.	There is no 10% additional tax. See Early Distributions.
when to report as income	Any taxable part (including the taxable part of any amount withheld) not rolled over is income to you in the year paid.	Any taxable part is not income to you until later distributed to you from the IRA.

If you decide to roll over any part of a distribution, the direct rollover option will generally be to your advantage. This is because you will not have 20% withholding or be subject to the 10% additional tax under that option.

If you have a lump-sum distribution and do not plan to roll over any part of it, the distribution may be eligible for special tax treatment that could lower your tax for the distribution year. In that case, you may want to see Publication 575 and Form 4972, Tax on Lump-Sum Distributions, and its instructions to determine whether your distribution qualifies for special tax treatment and, if so, to figure your tax under the special methods.

You can then compare any advantages from using Form 4972 to figure your tax on the lump-sum distribution with any advantages from rolling over all or part of the distribution. If you roll over any part of the lump-sum distribution, however, you cannot use the Form 4972 special tax treatment for any part of the distribution.

Contributions you made to your employer's plan. You can roll over a distribution of voluntary deductible employee contributions (DECs) you made to your employer's plan. Prior to January 1, 1987, employees could make and deduct these contributions to certain qualified employers' plans and government plans. These are not the same as an employee's elective contributions to a 401(k) plan, which are not deductible by the employee.

If you receive a distribution from your employer's qualified plan of any part of the balance of your DECs and the earnings from them, you can roll over any part of the distribution.

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