Can You Transfer Your IRA to Another Person?

The intent of the legislation that created individual retirement accounts was to encourage saving for retirement. As a result, IRAs are designed to be the property of the owner and can't be transferred to another person except under two circumstances:

  1. Divorce settlement
  2. Inheritance

Divorce Settlement

An IRA may be transferred to a spouse or ex-spouse as the result of a divorce </ahref="http:>or separation decree. The spouse receiving the IRA becomes the owner of the assets in the other spouse's IRA on the effective date of the transfer. The two methods to transfer the assets are:

  • Name change: The transfer is executed by changing the name of the IRA owner from that of one spouse or former spouse to that of the other.
  • Direct transfer: The custodian of one spouse's IRA does a direct trustee-to-trustee transfer of assets to the IRA of the other spouse. The IRA of the spouse receiving the transfer may be a new or existing one.

Both methods are tax-free -- they do not create taxable income for the receiving spouse. In the case of a partial transfer, some of the assets are moved to a different new or existing IRA. Ownership of the original IRA then is assigned to the other spouse or former spouse.

Required Distributions

The owner of an IRA can name a spouse, one or more other individuals, or an entity - a trust, charity or estate -- to be the beneficiary of the IRA. The rules for the transfer of an IRA to a beneficiary are complex and require an understanding of required minimum distributions. The owner of a traditional IRA must begin taking annual distributions by April 1 -- the required beginning date -- in the year after reaching age 70 1/2. The amount is based on the owner's life expectancy.

Spousal Inheritance

If the sole beneficiary is a surviving spouse, that spouse can take ownership of the IRA upon the death of the owner. Alternatively, the surviving spouse can roll over the inherited IRA's assets into her own IRA or another qualified retirement plan. In either case, the transfer is not a taxable event. The surviving spouse does not have to withdraw the inherited assets from the IRA until she reaches the required beginning date. However, if the deceased had reached the required beginning date at the time of death, the surviving spouse must take the deceased spouse's required distribution for the year of death, unless the distribution was made before the spouse died.

Non-Spousal Inheritance

When an individual other than a spouse inherits an IRA, the beneficiary is not allowed to contribute to the IRA or roll money into or out of the IRA. However, the beneficiary can establish a new IRA -- in the name of the deceased for the benefit of the beneficiary -- and make a tax-free trustee-to-trustee transfer from the inherited IRA to the new one. The rules that determine how quickly the beneficiary must take distributions involve the age of the deceased at death, the beneficiaries age, the presence of multiple beneficiaries, and whether the beneficiaries include a non-individual. If the beneficiary is not an individual, the entire IRA must be distributed within a five-year period beginning on September 30 in the year following the owner's death.