Recently, the IRS released an information letter, explaining the tax treatment on two inherited retirement accounts. The beneficiary requested that all distributions from both IRAs be rolled over in order to avoid taxable income. Unfortunately, the IRS, under IRC § 402(b)(2), treats all amounts distributed from a retirement plan as taxable income. However, there is an exception—under § 402(c), distributions from a retirement plan that roll over into another plan, such as a direct trustee-to-trustee transfer, are treated as a direct rollover contribution. Although, if this distribution does not go to a spouse, then it is not eligible for rollover.
See Dawn S. Markowitz, Inherited IRA Distributions Treated as Taxable, Wealth Management, October 20, 2016.
