4.4 Portability Between IRA Types and Inherited IRA Transfer Restrictions

The Master IRA Portability Matrix

Retirement plan portability refers to the legal ability of an account owner to move assets between different types of tax-advantaged accounts. While the Internal Revenue Code permits broad flexibility, statutory barriers restrict transfers between specific account types. Bank IRA administrators must master the Master IRA Portability Matrix to prevent illegal transfers, account disqualification, and severe tax penalties.

The Portability Rules Across Account Types

1. Traditional IRA to Traditional IRA: Full portability via direct trustee-to-trustee transfer (unlimited frequency) or 60-day indirect rollover (subject to the 1-per-12-month rule of IRC Section 408(d)(3)(B)).
2. Traditional IRA to Roth IRA (Conversion): Permissible under IRC Section 408A(d)(3). Pre-tax contributions and earnings are included in gross income as taxable ordinary income. Converted funds are exempt from the 10% penalty under IRC Section 72(t).
3. SEP IRA to Traditional IRA / Roth IRA: Under IRC Section 408(k), a SEP IRA is fundamentally a Traditional IRA that receives employer contributions. Once deposited, SEP assets are treated identically to Traditional IRA funds. A SEP IRA can be transferred to a Traditional IRA or converted to a Roth IRA at any time without waiting periods.
4. SIMPLE IRA to Traditional IRA / Roth IRA (The 2-Year Rule): Governed by IRC Section 408(d)(3)(G), with the 25% additional tax in IRC Section 72(t)(6). A SIMPLE IRA cannot be transferred or rolled over into a Traditional IRA, Roth IRA, SEP IRA, or qualified employer plan during the first two years of participation. After two full years, full portability applies. SECURE 2.0 § 332 adds one exception: if the employer terminates its SIMPLE IRA plan and replaces it with a safe harbor 401(k) plan, a distribution within the two years may be rolled into a 401(k) or 403(b) plan that applies the elective-deferral distribution limits (Notice 2024-2, Q&A G-4).
5. Traditional IRA to SIMPLE IRA: Under the Protecting Americans from Tax Hikes (PATH) Act of 2015, Traditional IRA funds may be rolled over or transferred into a SIMPLE IRA, provided the employee has participated in the receiving SIMPLE IRA plan for at least two years.
6. Traditional IRA to Qualified Employer Plan: Under IRC Section 408(d)(3)(A)(ii), only pre-tax IRA assets can be rolled into a 401(k), 403(b), or governmental 457(b) plan. Qualified plans are statutorily prohibited from accepting after-tax IRA basis.
7. Roth IRA to Qualified Employer Plan: Strictly prohibited. Roth IRAs can never be rolled into an employer-sponsored plan (including a designated Roth 401(k)).

The SIMPLE IRA Two-Year Holding Rule (IRC Section 72(t)(6))

The most heavily tested restriction on the CISP examination is the SIMPLE IRA 2-year rule codified under IRC Section 72(t)(6) and IRC Section 408(d)(3)(G).

Commencement and Measurement of the 2-Year Clock

The statutory two-year clock begins on the exact date that the initial contribution (whether an employee salary reduction or an employer matching/non-elective contribution) is first deposited into the participant's SIMPLE IRA account. The clock does not begin when the employer establishes the plan document, nor when the employee executes the salary reduction agreement; it begins on the physical deposit settlement date.

Consequences of a Premature Transfer or Rollover

If an employee attempts to move funds from a SIMPLE IRA to a Traditional IRA, Roth IRA, or qualified plan before the two-year clock has expired:

1. Rollover Disqualification: The transaction fails statutory rollover treatment under IRC Section 408(d)(3)(G).
2. Ordinary Income Tax: The full distributed amount is included in gross income as taxable ordinary income.
3. The Punitive 25% Premature Penalty: Under IRC Section 72(t)(6), the standard 10% early distribution penalty is increased to a punitive 25% excise tax. If a 35-year-old employee prematurely rolls over $40,000 from a SIMPLE IRA to a Traditional IRA, the distribution triggers ordinary income tax plus a $10,000 penalty (25% of $40,000).
4. Permissible Same-Plan Transfers: During the 2-year window, an employee is permitted to transfer funds exclusively to another SIMPLE IRA maintained under the same or another employer's SIMPLE plan.

Inherited IRAs: Statutory Transfer Restrictions for Non-Spouse Beneficiaries

When an IRA owner dies, the custodial account becomes an Inherited IRA (also known as a Beneficiary IRA). Portability rules for inherited IRAs differ fundamentally from those governing owner-held accounts.

The Strict Prohibition on 60-Day Indirect Rollovers (IRC Section 408(d)(3)(C))

Under IRC Section 408(d)(3)(C), an inherited IRA is statutorily defined as any IRA acquired by an individual by reason of the death of another individual, where the beneficiary is not the surviving spouse. The statute explicitly states:

"This paragraph [the 60-day rollover provision] shall not apply to any amount received by an individual from an inherited individual retirement account or inherited individual retirement annuity."

Consequence for Non-Spouse Beneficiaries: A non-spouse beneficiary (e.g., adult child, grandchild, sibling, friend, trust, or estate) is strictly prohibited from executing a 60-day indirect rollover. If a non-spouse beneficiary requests a distribution check payable to themselves personally, the distribution is irrevocably taxable. The funds cannot be redeposited, returned to the distributing custodian, or transferred to another inherited IRA. Any attempt to deposit the funds into an IRA will be rejected or classified as an impermissible excess contribution.

The Sole Permissible Transfer Method: Direct Trustee-to-Trustee Transfer

Under Revenue Ruling 78-406 and IRS Notice 2007-7, a non-spouse beneficiary who wishes to move inherited IRA assets to a different financial institution may do so exclusively via a direct trustee-to-trustee transfer. The distributing custodian must wire the funds or issue a check payable directly to the successor custodian FBO the inherited account.

Mandatory Titling Conventions for Inherited IRAs

To maintain the tax-exempt status of an inherited IRA and ensure proper IRS compliance, the account title at the receiving institution must adhere to rigid statutory formatting. Under IRS guidance (Notice 2007-7, Q&A-13, and the Form 5498 instructions), the title must explicitly satisfy two conditions:

1. It must identify the deceased original account owner (and indicate that the owner is deceased);
2. It must identify the beneficiary.

Standard Acceptable Titling Formats

• "Jane Doe, Deceased, FBO John Doe, Beneficiary Traditional IRA"
• "ABC Bank, Custodian FBO John Doe, Beneficiary, Traditional IRA (Inherited from Jane Doe, Deceased)"
• "First National Trust Co., Custodian FBO Mary Smith Inherited Traditional IRA FBO Robert Smith, Deceased"

Tax Reporting for Inherited Accounts

Although the deceased owner's name must appear on the account title, the account is established under the beneficiary's Social Security Number (SSN) or the trust's Employer Identification Number (EIN). All subsequent tax filings (Form 5498 reporting fair market value and Form 1099-R reporting beneficiary distributions under Distribution Code 4) are reported under the beneficiary's taxpayer identification number.

Surviving Spouse Transfer and Rollover Privileges

Under IRC Section 408(d)(3)(C)(ii)(II), the Internal Revenue Code grants a unique statutory exception to surviving spouses. A surviving spouse who is the sole designated beneficiary of an IRA has three distinct options, granting them complete flexibility:

Option 1: Spousal Rollover to Own IRA

The surviving spouse may take a distribution and roll it over into their own existing or newly established IRA, or execute a direct rollover. The rollover may be executed as a direct trustee transfer or as a 60-day indirect rollover.

• Tax Result: The funds become the spouse's own IRA assets. RMDs are deferred until the surviving spouse reaches their own statutory RMD age (age 73 or 75 under SECURE 2.0).
• The Under-Age-59½ Pitfall: If the surviving spouse is under age 59½ and requires cash for living expenses, rolling the funds into their own IRA is dangerous: any subsequent distribution from their own IRA is subject to the 10% premature distribution penalty under IRC Section 72(t).

Option 2: Treat the Inherited IRA as Own

Under Treasury Regulation § 1.408-8, Q&A-5, a surviving spouse who is the sole beneficiary may elect to treat the decedent's IRA as their own simply by redesignating the account title into their sole personal name, making an annual contribution to the account, or failing to take a required beneficiary RMD. This has the same legal effect as Option 1.

Option 3: Maintain as an Inherited (Beneficiary) IRA

The surviving spouse may elect to maintain the account as an Inherited IRA titled in the deceased spouse's name FBO the surviving spouse.

• The Critical Under-Age-59½ Advantage: Under IRC Section 72(t)(2)(A)(ii), distributions made to a beneficiary from an inherited IRA are completely exempt from the 10% premature distribution penalty, regardless of the beneficiary's age! A 48-year-old surviving spouse who maintains the account as an inherited IRA can take penalty-free distributions to support their family. Once the surviving spouse reaches age 59½, they can roll the remaining balance into their own IRA.

Bank Administrative Scenarios & Operational Safeguards

Scenario 1: Intake of Non-Spouse Beneficiary Distribution Check

A 30-year-old customer arrives at a branch with a $75,000 cashier's check issued by another financial institution. The check is made payable directly to the customer: "Pay to the order of David Williams". The customer explains that this represents their share of their deceased father's IRA, and they wish to deposit it into a new Inherited IRA within 60 days.

Correct Administrative Action: The bank IRA administrator must refuse the deposit. Under IRC Section 408(d)(3)(C), non-spouse beneficiaries cannot perform indirect rollovers. Because the check was made payable to the beneficiary personally, the $75,000 distribution is permanently and irrevocably taxable to the customer. Depositing the funds into an inherited IRA is legally void, and depositing them into the customer's own IRA would create an impermissible excess contribution. The customer should have been advised by the distributing institution to request a direct trustee-to-trustee transfer.

Scenario 2: Processing Transfers During the SIMPLE IRA 2-Year Window

A 41-year-old small business employee participates in a SIMPLE IRA plan at Bank A, with the initial employer contribution deposited on October 15, 2024. On November 1, 2025 (12.5 months later), the employee requests a direct trustee-to-trustee transfer of their $18,000 balance to an individual Traditional IRA at Bank B.

Correct Administrative Action: Bank A's IRA operations department should decline to process the request as a tax-free transfer. Under IRC Section 408(d)(3)(G), SIMPLE IRA assets cannot move tax-free to a Traditional IRA until the two-year period that began October 15, 2024 has ended (on or after October 15, 2026). Bank A should explain that if the money were moved now, the 1099-R instructions treat it as a distribution reported with code S: the $18,000 would be taxable as ordinary income plus a 25% additional tax ($4,500), and the receiving traditional IRA would have to treat the deposit as a regular contribution, most of it an excess contribution. The employee may transfer the funds to another SIMPLE IRA now.