No amount of money in an inherited IRA can make up for the loss of a spouse. And, if you're not careful, you could end up sharing a lot more than is necessary with the IRS. The rules differ depending whether or not assume the IRA -- that is, whether you elect to treat that IRA as if you were always the owner. Knowing and following the rules with regard to rollovers can help you maximize what you keep.
To assume the IRA, the surviving spouse must be the sole beneficiary and have unlimited withdrawal rights. You take ownership of the IRA by either contributing money to the account or by skipping the required minimum distribution. Once you assume the IRA, it's treated as if you had always been the owner of the IRA. In that case, the rollover rules are the same as for any other IRA you own.
Regular Rollover Rules
Once a surviving spouse has assumed ownership of an inherited IRA, the rollover be completed within 60 days from the time the distribution is taken. In addition, you must wait 12 months between rollovers involving the same account. For example, if you roll money into the inherited IRA, you must wait for at least 12 months before you roll over a distribution from the account. Any distributions you take before 12 months pass aren't eligible to be rolled over.
If you are a surviving spouse and do not assume the inherited IRA, your distributions -- other than required minimum distributions, which can never be rolled over -- can be rolled into your own IRAs. Again, the rollover must be completed within 60 days. For example, suppose you are not the sole beneficiary of the IRA and therefore you can't treat it as your own. If your required minimum distribution is $6,000 but you take out $16,000, you could roll $10,000 into your own IRA.
Once you either assume ownership of the inherited IRA or roll money from the inherited IRA into your own IRA, the early withdrawal penalty exception for beneficiary distributions no longer applies to those amounts. For example, if you assume your spouse's traditional IRA and you're not yet 59 1/2, any distributions you take are hit with the 10 percent early withdrawal penalty. Similarly, if you rolled $50,000 from your spouse's IRA into your own, you couldn't then take that money out of your IRA without penalty unless you were eligible for a qualified withdrawal.