If you inherit an individual retirement account, required disbursements depend on your relationship to the decedent, the age of the decedent and whether or not he was already taking distributions. For non-spousal beneficiaries, a common choice for inherited IRAs is the trustee-to-trustee transfer, in which the decedent is named as the account owner with the beneficiary as the inheritor.
Spousal Inherited IRAs
The surviving spouse has an option not available to other inherited IRA beneficiaries. The spouse may roll the inherited IRA over into her own account, or treat it as her own. Unlike other types of beneficiaries, the spouse may make additional contributions to an inherited IRA if treating it as her own. If it is a traditional IRA, the spouse must begin taking distributions by the age of 70-1/2, and distributions should be calculated based on the Internal Revenue Service's life expectancy charts. If it is a Roth IRA, there is no mandatory age for distributions. The spouse may also choose the options allowed for non-spousal beneficiaries.
Required Minimum Distributions
For traditional or Roth inherited IRAs, the beneficiary must make required minimum distributions based on his life expectancy, as per the IRS's tables for single life expectancy. Even though a personal Roth IRA account does not require mandatory distributions, an inherited Roth IRA requires the beneficiary to take distributions by age 70-1/2. However, like other Roth IRAs, these distributions are tax-free if the decedent held the account for a minimum of five years, while traditional inherited IRA distributions are taxed as ordinary income. If more than one beneficiary inherits the IRA, required minimum distributions must be calculated based on the oldest beneficiary's life expectancy.
The Five-Year Rule
If the decedent had not yet reached the age of 70-1/2, the beneficiary may qualify for the five-year rule, which permits assets to be withdrawn before Dec. 31 of the fifth anniversary year of the death of the decedent. Assets may be withdrawn in any amount during this period. If using this option, the IRS does not penalize beneficiaries for not taking required minimum distributions if the inherited IRA account is closed by the fifth anniversary.
If the decedent was already withdrawing required minimum distributions, the beneficiary must choose between withdrawing the entire amount of the inherited IRA or taking distributions based on his own life expectancy.
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