What is an “inherited IRA”? It’s simply an IRA that a person inherits from a dead person.
When a person dies, only his spouse can roll over the dead person’s IRA into their own IRA. Every other beneficiary must hold the IRA as an inherited account . . . as an “inherited IRA.”
They’re treated differently than traditional IRAs: With an inherited IRA, the owner may withdraw funds at any time without tax penalties and, in fact, is required either to withdraw the entire balance within five years after the original owner’s death or take annual minimum distributions. And an owner may never make contributions to an inherited IRA.
A further distinction: An inherited IRA is not exempt in bankruptcy. The U.S. Supreme Court recently issued a decision in this matter (Clark v. Rameker), thereby resolving a split in the circuits.