When the owner of an individual retirement arrangement dies, the custodian of the account will retain the IRA assets for the beneficiaries. The law doesn't impose pressing deadlines for the transfer of inherited IRA money, but important decisions should be made as soon as possible concerning how the money will be withdrawn from the IRA and be taxed. The different withdrawal options have deadlines for when the process must be started.
Retitle Inherited IRA
It is not necessary to transfer an inherited IRA. The account can be retitled to reflect the heir's ownership rights in the account. A spouse beneficiary can retitle the account into her own name and treat it as her personal IRA. For nonspouse beneficiaries, the IRA will be titled as a beneficiary IRA. With multiple beneficiaries, the custodian will divide the account into separate beneficiary IRAs.
Default Withdrawal Option
If a nonspouse beneficiary makes no other arrangements for the inherited IRA, the full account value must be withdrawn and declared for taxes by the end of the fifth year after the owner's death. The money can be withdrawn at any time during the five years as long as all of it is out by the time limit. Transferring the IRA to another beneficiary titled account does not change the five-year cutoff. A transfer does not stop or reset the five-year clock. The five years count from the original IRA owner's year of death.
Stretch IRA Time Limit
With the stretch IRA option, the heir elects to take annual withdrawals based on her life expectancy. The purpose of this choice is to minimize the required and taxable withdrawals and keep the bulk of the account growing in a tax-deferred way. The minimum annual distribution option for an inherited IRA must be elected and the first withdrawal taken by the end of the year following the account owner's death; Dec. 31 in the year after the account owner's death should be the latest that a decision is made concerning the disposition of an inherited IRA.
Transferring Inherited IRA
An inherited IRA can be transferred to another custodian or type of IRA at any time. The beneficiary title designation will follow along to the new account chosen by the heir for the retirement plan money, and the selected withdrawal option -- total in five years or stretch payments -- remains the same. An inherited IRA must be kept separate and cannot be co-mingled with other IRA accounts, even other inherited IRA funds. If an heir tries to roll over instead of transfer the inherited IRA, the money becomes immediately taxable to the beneficiary.