If you open an individual retirement account, the Internal Revenue Service won't require you to take any distributions until you reach the age of 70 1/2. If you inherit an IRA that once belonged to someone else, however, the IRS typically requires that you begin receiving distributions soon after you become the account's owner.
Options for Spouses
If a beneficiary receives an IRA from a deceased spouse, she can choose to either treat the account as an inherited IRA or roll it over into a new account. If she rolls the IRA over into a new account, she can treat the IRA as if it were her own, and she will be subject to all of the same rules and policies that apply to any other traditional IRA. Any distributions taken before she reaches 59 1/2 may be subject to a penalty, and she must begin taking distributions by age 70 1/2.
Rules for Inherited IRAs
Non-spouse beneficiaries and spouses who don't roll their inherited IRAs into new accounts are subject to a special set of distribution guidelines. After the original account owner dies, beneficiaries have five years to begin taking distributions. If a beneficiary doesn't want to receive all of the money from the account at once, he can divide the contents into equal distributions to be received over his life based on how long he expects to live. Otherwise, he must liquidate the account completely by the end of the fifth year after the original owner's death.
Minimum Required Distributions
In addition to making a plan for distributions within the first five years of owning the plan, individuals who inherit IRAs must also make sure the original owner of the account took all of his minimum required distributions while he was alive. For example, if the original owner died after age 70 1/2 and didn't receive the required distribution for the year of his death, the new owner must take the distribution for him. Failing to take this distribution results in a 50 percent penalty.
Any distributions from a traditional IRA will be subject to income tax when the beneficiary receives them. If a beneficiary receives all of the funds in the account at once, the tax bill can be large. For this reason, beneficiaries often opt to receive distributions in installments over their lifetimes. Roth IRAs won't incur income tax regardless of the distribution method chosen.