Publication 590 - Individual Retirement Arrangements (IRAs)

Publication 590

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If you inherit a traditional IRA, you are called a beneficiary. A beneficiary can be any person or entity the owner chooses to receive the benefits of the IRA after he or she dies. Beneficiaries of a traditional IRA must include in their gross income any taxable distributions they receive.

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If you inherit a traditional IRA from your spouse, you generally have the following three choices. You can:

Treat it as your own IRA by designating yourself as the account owner.
Treat it as your own by rolling it over into your IRA, or to the extent it is taxable, into a:
1. Qualified employer plan,
2. Qualified employee annuity plan (section 403(a) plan),
3. Tax-sheltered annuity plan (section 403(b) plan),
4. Deferred compensation plan of a state or local government (section 457 plan), or
Treat yourself as the beneficiary rather than treating the IRA as your own.

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You will be considered to have chosen to treat the IRA as your own if:

Contributions (including rollover contributions) are made to the inherited IRA, or
You do not take the required minimum distribution for a year as a beneficiary of the IRA.

You will only be considered to have chosen to treat the IRA as your own if:

You are the sole beneficiary of the IRA, and
You have an unlimited right to withdraw amounts from it.

However, if you receive a distribution from your deceased spouse's IRA, you can roll that distribution over into your own IRA within the 60-day time limit, as long as the distribution is not a required distribution, even if you are not the sole beneficiary of your deceased spouse's IRA. For more information, see When Must You Withdraw Assets? (Required Minimum Distributions), later.

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If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. This means that you cannot make any contributions to the IRA. It also means you cannot roll over any amounts into or out of the inherited IRA. However, you can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary.

Like the original owner, you generally will not owe tax on the assets in the IRA until you receive distributions from it. You must begin receiving distributions from the IRA under the rules for distributions that apply to beneficiaries.

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If you inherit a traditional IRA from a person who had a basis in the IRA because of nondeductible contributions, that basis remains with the IRA. Unless you are the decedent's spouse and choose to treat the IRA as your own, you cannot combine this basis with any basis you have in your own traditional IRA(s) or any basis in traditional IRA(s) you inherited from other decedents. If you take distributions from both an inherited IRA and your IRA, and each has basis, you must complete separate Forms 8606 to determine the taxable and nontaxable portions of those distributions.

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A beneficiary may be able to claim a deduction for estate tax resulting from certain distributions from a traditional IRA. The beneficiary can deduct the estate tax paid on any part of a distribution that is income in respect of a decedent. He or she can take the deduction for the tax year the income is reported. For information on claiming this deduction, see Estate Tax Deduction under Other Tax Information in Publication 559, Survivors, Executors, and Administrators.

Any taxable part of a distribution that is not income in respect of a decedent is a payment the beneficiary must include in income. However, the beneficiary cannot take any estate tax deduction for this part.

A surviving spouse can roll over the distribution to another traditional IRA and avoid including it in income for the year received.

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For more information about rollovers, required distributions, and inherited IRAs, see:

Rollovers, later under Can You Move Retirement Plan Assets,
When Must You Withdraw Assets? (Required Minimum Distributions), later, and
The discussion of IRA beneficiaries later under When Must You Withdraw Assets? (Required Minimum Distributions).

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Worksheet 1-2. Figuring Your Reduced IRA Deduction for 2010—Example 1 Illustrated

(Use only if you or your spouse is covered by an employer plan and your modified AGI falls between the two amounts shown below for your coverage situation and filing status.)
Note. If you were married and both you and your spouse contributed to IRAs, figure your deduction and your spouse's deduction separately.

IF you ...		AND your filing status is ...	AND your modified AGI is over ...	THEN enter on line 1 below ...
are covered by an employer plan		single or head of household	$56,000	$66,000
		married filing jointly or qualifying widow(er)	$89,000	$109,000
		married filing separately	$0	$10,000
are not covered by an employer plan, but your spouse is covered		married filing jointly	$167,000	$177,000
		married filing separately	$0	$10,000
1.	Enter applicable amount from table above				1.	109,000
2.	Enter your *modified AGI* (that of both spouses, if married filing jointly)				2.	92,555
	Note. If line 2 is equal to or more than the amount on line 1, stop here. Your IRA contributions are not deductible. See Nondeductible Contributions.
3.	Subtract line 2 from line 1. If line 3 is $10,000 or more ($20,000 or more if married filing jointly or qualifying widow(er) and you are covered by an employer plan), stop here. You can take a full IRA deduction for contributions of up to $5,000 ($6,000 if you are age 50 or older) or 100% of your (and if married filing jointly, your spouse's) compensation, whichever is less				3.	16,445
4.	Multiply line 3 by the percentage below that applies to you. If the result is not a multiple of $10, round it to the next highest multiple of $10. (For example, $611.40 is rounded to $620.) However, if the result is less than $200, enter $200.
	Married filing jointly or qualifying widow(er) and you are covered by an employer plan, multiply line 3 by 25% (.25) (by 30% (.30) if you are age 50 or older). All others, multiply line 3 by 50% (.50) (by 60% (.60) if you are age 50 or older).				4.	4,120
5.	Enter your compensation minus any deductions on Form 1040 or Form 1040NR, line 27 (one-half of self-employment tax) and line 28 (self-employed SEP, SIMPLE, and qualified plans). If you are filing a joint return and your compensation is less than your spouse's, include your spouse's compensation reduced by his or her traditional IRA and Roth IRA contributions for this year. If you file Form 1040 or Form 1040NR, do not reduce your compensation by any losses from self-employment				5.	59,000
6.	Enter contributions made, or to be made, to your IRA for 2010 but do not enter more than $5,000 ($6,000 if you are age 50 or older). If contributions are more than $5,000 ($6,000 if you are age 50 or older), see Excess Contributions, later.				6.	5,000
7.	IRA deduction. Compare lines 4, 5, and 6. Enter the smallest amount (or a smaller amount if you choose) here and on the Form 1040, 1040A, or 1040NR line for your IRA, whichever applies. If line 6 is more than line 7 and you want to make a nondeductible contribution, go to line 8				7.	4,120
8.	Nondeductible contribution. Subtract line 7 from line 5 or 6, whichever is smaller. Enter the result here and on line 1 of your Form 8606				8.	880

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Worksheet 1-2. Figuring Your Reduced IRA Deduction for 2010—Example 2 Illustrated

IF you ...		AND your filing status is ...	AND your modified AGI is over ...	THEN enter on line 1 below ...
are covered by an employer plan		single or head of household	$56,000	$66,000
		married filing jointly or qualifying widow(er)	$89,000	$109,000
		married filing separately	$0	$10,000
are not covered by an employer plan, but your spouse is covered		married filing jointly	$167,000	$177,000
		married filing separately	$0	$10,000
1.	Enter applicable amount from table above				1.	177,000
2.	Enter your *modified AGI* (that of both spouses, if married filing jointly)				2.	171,555
	Note. If line 2 is equal to or more than the amount on line 1, stop here. Your IRA contributions are not deductible. See Nondeductible Contributions.
3.	Subtract line 2 from line 1. If line 3 is $10,000 or more ($20,000 or more if married filing jointly or qualifying widow(er) and you are covered by an employer plan), stop here. You can take a full IRA deduction for contributions of up to $5,000 ($6,000 if you are age 50 or older) or 100% of your (and if married filing jointly, your spouse's) compensation, whichever is less				3.	5,445
4.	Multiply line 3 by the percentage below that applies to you. If the result is not a multiple of $10, round it to the next highest multiple of $10. (For example, $611.40 is rounded to $620.) However, if the result is less than $200, enter $200.
	Married filing jointly or qualifying widow(er) and you are covered by an employer plan, multiply line 3 by 25% (.25) (by 30% (.30) if you are age 50 or older). All others, multiply line 3 by 50% (.50) (by 60% (.60) if you are age 50 or older).				4.	2,730
5.	Enter your compensation minus any deductions on Form 1040 or Form 1040NR, line 27 (one-half of self-employment tax) and line 28 (self-employed SEP, SIMPLE, and qualified plans). If you are filing a joint return and your compensation is less than your spouse's, include your spouse's compensation reduced by his or her traditional IRA and Roth IRA contributions for this year. If you file Form 1040 or Form 1040NR, do not reduce your compensation by any losses from self-employment				5.	40,000
6.	Enter contributions made, or to be made, to your IRA for 2010 but do not enter more than $5,000 ($6,000 if you are age 50 or older). If contributions are more than $5,000 ($6,000 if you are age 50 or older), see Excess Contributions, later.				6.	5,000
7.	IRA deduction. Compare lines 4, 5, and 6. Enter the smallest amount (or a smaller amount if you choose) here and on the Form 1040, 1040A, or 1040NR line for your IRA, whichever applies. If line 6 is more than line 7 and you want to make a nondeductible contribution, go to line 8				7.	2,730
8.	Nondeductible contribution. Subtract line 7 from line 5 or 6, whichever is smaller. Enter the result here and on line 1 of your Form 8606				8.	2,270

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What if You Inherit an IRA?(p18)

Inherited from spouse.(p18)

Inherited from someone other than spouse.(p18)

IRA with basis.(p18)

Federal estate tax deduction.(p18)

More information.(p18)

Worksheet 1-2. Figuring Your Reduced IRA Deduction for 2010—Example 1 Illustrated

Worksheet 1-2. Figuring Your Reduced IRA Deduction for 2010—Example 2 Illustrated