Inherited IRAs have four possible types, as there are two tax-status types and two beneficiary types, each of which determine the treatment they will receive by the IRS and the rules they must follow: Traditional vs Roth, and Spousal vs Non-spousal.
Inherited Traditional IRAs for Spouses: Pre-tax accounts left to beneficiaries who are spouses can be treated as if they were their own accounts. They can either change the name to be reflected as the owner of the account or it can be rolled into their existing individual retirement account. This includes SEP IRAs, Simple IRAs, Rollover IRAs, and Traditional 401(k)s, among others. If required minimum distributions (RMDs) have not begun with the deceased, they can be deferred until the age of 72. Owners of an inherited Traditional IRA must include in their gross income any taxable distributions they receive from that IRA.
Inherited Roth IRAs for spouses: After-tax accounts have the same beneficial treatment where they can be updated to reflect the spouse's ownership. This includes Roth 401(k)s, Roth 403(b)s, and Roth IRAs, among others. Distributions are tax-free if the inherited accounts that have previously been funded with after-tax contributions and if the original account has been at least five years old.
Inherited Traditional IRAs for Non-Spouses: All pre-tax accounts left to beneficiaries can be rolled into an inherited Traditional IRA. Unlike spouses, other beneficiaries cannot treat the inherited IRAs as their own, cannot make additional contributions, or rollover to their existing IRA account. Additionally, they usually must cash out within 10 years of the original owner’s death (there are some exceptions to this rule). Owners of an inherited Traditional IRA must include in their gross income any taxable distributions they receive from that IRA.
Inherited Roth IRAs for Non-Spouses: After- tax accounts for non-spouse beneficiaries have similar treatment to pre-tax accounts for non-spouses. Some pre-tax employer accounts, such as a Traditional 401(k), are able to be rolled over directly into an inherited Roth IRA as a conversion, which would be a taxable event. If those accounts have already been rolled over to an inherited Traditional IRA, conversions are no longer possible because inherited Traditional IRAs are not allowed to be converted to inherited Roth IRAs for non-spouse beneficiaries. These are also subject to the 10-year cash out rule (there are some exceptions to this rule).
Speak to a financial planner or tax advisor to understand what would be most beneficial to you in your circumstances.