If you inherit an IRA from a spouse, parent, or any other person, the inheritance itself isn’t taxable to you for federal income tax purposes. However, the funds in the IRA become taxable to you when you take distributions from the account. Here is what you need to know about taking distributions.

In general, a person who inherits an IRA must take required minimum distributions (RMDs) over his/her life expectancy or draw down the account in full by the end of five years following the year of the IRA owner’s death (“five-year rule”). Life expectancy is determined by looking at an IRS table for this purpose (see Table I in Appendix C of IRS Publication 590 (See www.irs.gov/pub/irs-pdf/p590.pdf).

Spousal Beneficiary

If an IRA is inherited by a surviving spouse, he/she can choose to roll over the funds to his/her own IRA. This allows the surviving spouse to postpone distributions until age 70 1/2 as well as to name new account beneficiaries. This rollover option can be used for part of the IRA; the rollover need not be all or nothing. A partial rollover allows the surviving spouse under age 59 1/2 to access the funds in the non-rolled-over account without an early distribution penalty.

Roth IRAs

While distributions from Roth IRAs are not taxable and are exempt from RMDs during the owner’s life, beneficiaries cannot keep the account open indefinitely to accrue tax-free income. Beneficiaries must take RMDs from Roth IRAs over their life expectancy. The same rules apply to distributions from all qualified tax deferred retirement plans. Read More