While sometimes you don't have to pay a tax on inherited money, you will if you inherit a traditional investment retirement account. Since traditional IRAs are funded with pretax dollars, you'll have to pay the taxes on an inherited IRA. Specific details of how much you'll have to pay in taxes vary depending on your situation.
Traditional vs. Roth
With a traditional IRA, you will have to pay taxes on the distributions you receive, whether you receive it all at once or spread out over time. Distributions from a Roth IRA, however, are not taxable. However, you may be responsible for taxes on any earnings if the account has been open less than five years.
Spousal vs. Non-Spousal
If you were the spouse of the deceased, you have the option of rolling over the funds in the inherited IRA into your own account and treating the funds as yours. This means that you will not have to pay any taxes until you decide to take money out of the accounts, or until you reach age 70 1/2, at which point you may be required to start taking distributions. If you received the IRA from someone other than your spouse, you can withdraw all of the money at one time, paying the necessary taxes at once. Or you can withdraw it over your lifetime, paying taxes only on the amounts you receive each year.
Lump Sum vs. RMDs
Both spouses and non-spouses have the option of receiving inherited IRA money in the form of a lump sum, or as required minimum distributions (RMDs) throughout their lifetimes. When you receive the lump sum, you must also pay a lump sum in taxes, but you have the advantage of having that extra money to pay for your expenses. If you take distributions, you will pay fewer taxes each year.
Your Total Income
The main factor that determines how much the taxes on an IRA inheritance will be is your total income for the year. The government will tax you on the combination of your salary or wages, plus the amount you receive as a distribution from the inheritance. The higher your salary or the higher the amount of money in the inherited IRA, the more you'll have to pay in taxes.