While an IRA is designed to supplement retirement income, many IRAs are passed on to spouses, children or other beneficiaries with large balances of money. When a beneficiary claims the IRA, he or she has several options as to how he or she can proceed with the inherited assets. The first option is to take a lump-sum distribution, which means the entire amount is added to ordinary income for the year the distribution is taken. The other option is to stretch the IRA assets by opening an inherited IRA and take the funds over time.
Speak with a tax adviser regarding the best option for your situation. If you are not seeking a lump-sum distribution, you must either complete the distribution by December 31 five years after the death or you can take a lifetime of distributions with a lump sum paid to your heirs if you die before the IRA is depleted.
Call or visit the IRA custodian. Request the appropriate paperwork to set up the inherited IRA based on your final distribution decision, which is irreversible.
Fill out the paperwork, marking the proper boxes designating whether you are taking a lifetime income, five-year distribution or a lump sum.
Submit the paperwork and wait for the distribution(s) to occur.