August 5, 2021 1:42 am

Transfer of IRA Assets to Non-IRA Can’t Be Reversed

When an IRA owner died, the account passed to a Trust. Some months after the death, the trustee transferred the funds into a regular brokerage account to be able to trade stocks. But he soon learned that since the inherited IRA was not directly transferred to another IRA, the entire transfer (assuming no after-tax contributions had been made by the owner) became taxable. The trustee asked the IRS if he could reverse the transfer and put the assets back into an inherited IRA for the benefit of the trust. The IRS said no (Letter Ruling 202125007). The reason: Assets in an inherited IRA may not be rolled over. The only way to get them into a new inherited IRA is via a direct trustee-to-trustee transfer, which didn’t happen here.

The lesson: Use care when inheriting an IRA:

  • Be sure to use the correct title (i.e., keep the decedent’s name in the title and indicate that the owner is the beneficiary).
  • Transfer assets only by means of a direct transfer.
  • Follow required minimum distribution (RMD) rules.
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Tax Glossary

Qualifying widow or widower

A filing status entitling the taxpayer with dependents to use joint tax rates for up to two tax years after the death of a spouse.

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