So you are inheriting an IRA and are now looking for the next steps to take. It is good you are gathering information on the internet. After researching for a while you should be well prepared for any discussion about the topic, but be aware that information on the internet may be outdated, may not apply to your specific circumstances, may be misinterpreted or plain out wrong. So read as much as you have to to feel somewhat familiar with the whole topic, but in the end you should consult an accountant or tax professional. We are neither and all the info on this site should be taken as general information and should in no way be construed as legal or tax advice.
With that out of the way, here is a short outline of the major things that influence the rules and possibilities.
Warning: Don’t Take Action Until You Are Sure What To Do
As long as you are not a 100% certain what the correct course of action in regard to your IRA inheritance is, don’t do anything. If you make a wrong move after inheriting an IRA you end up paying unnecessary taxes pretty easily reducing the worth of the inheritance by a large amount.
Inheriting an IRA: Major influencing factors
The first major factor is the relation of the late IRA owner to you. If the person in question was your spouse you have more flexibility in handling the IRA than otherwise. The second factor is the age of the late, original IRA account holder and your age.
If you are the surviving spouse
You can rollover the assets into your own existing IRA account. If you are not yet 59 ½ this is a good way to delay the start of the required minimum distribution withdrawals. If you want to access the money right away though, you will have to pay the 10% early withdrawal penalty.
An alternative is to create an inherited IRA account and move the money into that one. If you are older than your late spouse and he or she was not yet 70 ½, you can delay the minimum required distribution withdrawals until the point in time where he or she would have reached that age.
Another alternative is to withdraw everything at once. In this case the inherited assets are subject to regular income taxes so this is the most expensive option of them all.
If you are inheriting an IRA as a person other than the spouse
Generally, you must start taking distributions in one way or another. There is no way to delay the distribution after inheriting an IRA as a non-spouse.
You cannot rollover the IRA into your own IRA account, but you can create an inherited IRA account and rollover the assets into that. This account must be titled with the late person’s name and yours. Make sure to transfer the assets directly from one IRA to another. At no point should a check be issued to your name as this is interpreted as cash payout and subject to income tax.
Just as the spouse, you can take a full cash distribution of the inherited IRA. This money is subjected to income tax.
You can disclaim the inheritance entirely. In this case, the inheritance will be allowed to the next person in the beneficiary form if filed or the next default option provided by the IRA custodian. This may be desirable for tax purposes if you are close with whoever is going to receive the inheritance in that case.
In all cases, more details apply. As stated earlier, consult an attorney or tax professional when an inheriting an IRA.
More details in this official document: http://www.irs.gov/pub/irs-pdf/p590.pdf
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