When an IRA owner died, the account passed to a Trust. Some months after the death, the trustee transferred the funds into a regular brokerage account to be able to trade stocks. But he soon learned that since the inherited IRA was not directly transferred to another IRA, the entire transfer (assuming no after-tax contributions had been made by the owner) became taxable. The trustee asked the IRS if he could reverse the transfer and put the assets back into an inherited IRA for the benefit of the trust. The IRS said no (Letter Ruling 202125007). The reason: Assets in an inherited IRA may not be rolled over. The only way to get them into a new inherited IRA is via a direct trustee-to-trustee transfer, which didn’t happen here.
The lesson: Use care when inheriting an IRA:
IRA-type plan set up by an employer, rather than the employee. Salary-reduction contributions may be allowed to plans of small employers set up before 1997.