IRA Withdrawal for Beneficiaries

Inheriting an individual retirement account isn't the same as inheriting a pile of money with no strings attached. Traditional IRA distributions are taxed as income, and Roth IRA assets can be withdrawn tax free unless the account is less than five years old. IRA beneficiaries should become familiar with the rules regarding withdrawal from an IRA account.

RMD Requirement

If the person who died left you a traditional IRA from which he had started taking required minimum distributions, you must be sure the distributions for the year in which he died are disbursed by Dec. 31. If you are co-beneficiary with one or more people, the required minimum distributions should be divided accordingly.

Yearly Distributions

You have the option of taking yearly distributions that are calculated according to the single life-expectancy table published by the Internal Revenue Service. The table includes a life-expectancy figure that corresponds to your age. To calculate the distribution, divide the IRA's end-of-year value by the appropriate life-expectancy figure. You must begin taking yearly distributions by Dec. 31 of the year following the death.

Five-Year Option

Another option is to drain the account by the last day of the fifth year after the death. You can take the entire value in a lump sum or withdraw as much or as little as you like each year as long as you meet the five-year deadline.

Spouse Beneficiary Exception

If you are the spouse of an IRA holder and the sole primary beneficiary, you have an option not afforded other heirs: You can roll the inherited assets into an IRA of your own and no special rules then apply to the inherited funds; you treat them as your own. You can only roll traditional IRA funds into a traditional IRA and Roth assets into a Roth. Once the funds are rolled over, you do not have to take any distributions until you turn 70 1/2 as the spouse of a traditional IRA holder. If you inherit a Roth from your spouse, you never have to take distributions and can leave the burgeoning assets to your own designated beneficiaries, who can withdraw them tax free.

Roth Five-Year Earnings Clock

If the deceased had not owned the Roth for at least five years, you would have to pay income tax on any earnings withdrawals until the account is 5 years old. Say your uncle opened a Roth in 2011 and died in 2013. You would have to pay income tax if you withdrew earnings from the inherited account before Jan. 1, 2016. Because the IRS considers distributions in the following order -- contributions, rollovers, earnings -- you might not have to worry about the five-year clock for earnings withdrawals unless you elected to take the entire inherited IRA as a lump sum before 2016. For example, say your uncle's Roth included $200,000 in regular contributions, $200,000 in rollover funds and $100,000 in earnings. (Your uncle effected the rollover in 2007.) You elect to take yearly distributions from the account. Because your withdrawals would not exceed $400,000 -- that is, $200,000 in principal plus $200,000 in rollover money -- before January 2016, the five-year earnings clock would have no impact on your withdrawal activity. Therefore, you would have no tax liability.

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