30-Jun-21
No Inherited Rollovers
Take-Away: An inherited IRA cannot be rolled over to another inherited IRA.
Background: We are accustomed to individuals making a 60-day rollover of their IRA to another IRA. [IRC 408(d)(3).] We normally caution those individuals against such a move since mistakes can lead to missing the 60-day deadline, in turn leading to a taxable distribution of the amount distributed. Or those individuals run afoul the the rule that there can only be one IRA 60-day rollover within each 365 days.
Trustee-to-Trustee Transfers: Usually individuals are encouraged to make a trustee-to-trustee transfer from one IRA to another IRA. A trustee-to-trustee transfer of funds from one IRA to another IRA does not constitute a payment or distribution includible in gross income. [Revenue Ruling 78-406.]
60-day Rollover as Informal Loan: Yet some individuals continue to view the 60-day rollover option as an informal short-term loan to themselves. But what about a rollover on an inherited IRA?
No Rollovers with Inherited IRAs: Those same individuals are then surprised to learn that the 60-day IRA rollover option is not available with regard to an inherited IRA.
Assets held in an inherited IRA are not permitted to be rolled over under IRC 408(d)(3). That option is expressly denied to the funds held in an inherited IRA. [IRC 408(d)(3)(C)(i).]
PLR: This clear position was reaffirmed in a recent Private Letter Ruling where an inherited IRA payable to a trust was withdrawn and placed in an non-IRA investment account, and later within 60 days, proposed to be re-transferred by the trustee to an inherited IRA payable to the trust. The IRS said ‘nope, no can do.’ [PLR 202125007, March 26, 2021.]
Conclusion: The only permitted method of transferring assets from an inherited IRA to another inherited IRA is via a trustee-to-trustee transfer, which requires a direct transfer from one IRA to another IRA. Once the assets have been distributed from an inherited IRA there is no permitted method for transferring those assets back to anther (inherited) IRA.