Mistake 5: Rolling over an IRA when this is not allowed.

As I mentioned earlier, only a spouse may roll over an IRA into his or her name. This can happen in a variety of circumstances:

  1. The spouse is the primary beneficiary.
  2. The spouse is the contingent beneficiary and the primary beneficiaries disclaim their part.
  3. The beneficiary of the IRA is a trust/estate, and the spouse is the sole beneficiary of the trust/estate and all  other conditions are met.

However, I have seen many cases where the beneficiary other than the spouse, such as the son or daughter, has taken the money and rolled it over into his or her own IRA! This is not allowed! Please remember that not only will the non-spouse beneficiary have to pay income taxes on this distribution all at once, but there is also a penalty for rolling over too much!

As mentioned above, the proper course of action would be for the non-spouse beneficiary to establish an Inherited IRA and at least allow the tax to be deferred over a long period of time, rather than paying the tax all at once.

As discussed earlier, non-spouse beneficiaries are allowed to directly transfer (i.e., a direct rollover) an inherited qualified plan to an inherited IRA as long as such a transfer is allowed under the plan document. It is important for your advisor to review your plan document to determine if such a rollover is allowed.

When such a transfer is made, the payout period that the beneficiary must follow under the IRA will depend on a number of factors.

If you are a non-spousal beneficiary of a qualified plan, it is highly recommended that you consult with an advisor who is familiar with the rules before you make a rollover to an Inherited IRA.

Adapted from MD Producer Materials