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Inherited IRAs come with restrictions

My wife has an opportunity to buy additional time in her pension plan. She wants to use an IRA she inherited from my mother to do that. The pension buy-in form says she can transfer funds into the pension from a traditional IRA, but it specifies that you can’t do it from an inherited IRA.

My wife can take withdrawals from the inherited IRA without a penalty, but her yearly distribution from the account is included as income each year on our taxes. Can she use the money from the inherited IRA to open a regular IRA, and then transfer the money from the regular IRA to the pension plan without paying taxes on it?

No. An IRA beneficiary can only transfer an inherited IRA into a new IRA if he or she is the surviving spouse of the deceased owner. As a ‘non-spouse’ beneficiary, your wife must maintain the account as an inherited IRA.

The law allows employer-sponsored retirement plans like your wife’s pension plan to accept IRA transfers from their participants. When a pension or 401(k) plan offers this option to its participants, the transfers are tax-free because the money moves directly from the plan participant’s IRA into the pension or 401(k) plan in a trustee-to-trustee transaction.

But the law doesn’t let workplace retirement plans accept transfers of inherited IRAs.

As you’ve discovered, a ‘non-spouse’ beneficiary can tap an inherited IRA without an early-withdrawal penalty even if she’s under 59 1⁄2 years old. But she must take annual taxable distributions based on her life expectancy. She can’t avoid taking those distributions by moving the money into another tax-deferred retirement account.


Only a surviving spouse can postpone taxable distributions from an inherited IRA by transferring it to a new retirement account.


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