IRA Beneficiary Distribution Rules
If you are the beneficiary of an individual retirement account (IRA) it's important to get a handle on Internal Revenue Service (IRS) rules before you decide what to do with the assets. Your options will depend on your unique situation.
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Significance
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As an IRA beneficiary, the account's assets come directly to you. Generally, they are not subject to probate. If you are the account's sole beneficiary, you are free to direct its assets as you wish. If you are one of multiple beneficiaries, you may decide to manage the IRA jointly or divide it into separate accounts.
Time Frame
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Non-spouse beneficiaries may either close the IRA within five years after the decedent (original owner) dies or start withdrawing required minimum distributions (RMDs) the year after they inherit the account. Spousal beneficiaries have another option: they may decide to roll the IRA into their own retirement savings and take qualified withdrawals once they turn 59 and1/2 years of age.
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Considerations
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Generally, you get the greatest benefit by opting to take RMDs over a period of years, rather than withdrawal your inheritance in a lump sum. Consider that, if you take RMDs, the money still left in the account continues to grow earnings that you do not have to pay taxes on. The longer you let the money sit, the more taxes you avoid.
Warning
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Beneficiaries who are required to withdraw from an inherited IRA must do so within the time frame allotted by the IRS. Otherwise, they will be assessed a 50 percent tax penalty on the amount that they should have withdrawn for that tax year.
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References
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