Pension IRA Beneficiary Rights
When you receive a pension from a relative, you might have a few options as to how to take that IRA pension depending on your relationship to the original account holder. Since the IRA is a qualified retirement account, the IRS specifies the rules for distribution. Failure to comply with these rules earns you a stiff penalty.
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Spouse
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If you are the spouse of the original account holder, you may elect to treat the IRA as your own IRA. You can contribute to the account, you may make withdrawals from the account. You can also roll the account into a new account that you already own. Alternatively, you may take distributions from the account as you would any other inheritance.
Non-Spouse
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If you are not the spouse of the original account holder, your options are limited. You must take the inheritance. You are not allowed to treat it as your own. You may take the inheritance as either a lump sum of money, or systematic payments. If you opt for payments, the payments may be made over a period of five years, with the first payment required no more than a year after the death of the account owner. Otherwise, you may take lifetime payments starting immediately. The lifetime payments are based on your life expectancy at the age in which you start taking distributions.
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Benefit
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The benefit of inheriting an IRA is that, even for non-spouse inheritances, you have some degree of choice as to how to take the inheritance. Also, the penalty for early withdrawals doesn't apply. What this means is that, normally, the 10 percent penalty for all distributions prior to age 59 1/2 is waived by the IRS. You still must pay income tax on the inheritance (unless it is a Roth account, in which case normal Roth rules apply).
Warning
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If you fail to take distributions when you are required to do so, the IRS will assess you a 50 percent penalty on the amount of money that you should have taken, but did not. This is more of a concern for non-spouse inheritances. But, you must be aware of it. This penalty is substantial and will dramatically affect how much of your inheritance you get.
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