When someone leaves you an IRA as part of his inheritance, the first thing you should know is that the IRS will want its its portion of the money if it is due any. You have different options for withdrawing the money from an inherited IRA. If taxes are due, you will pay them when you withdraw the money from the account. IRA accounts bypass probate and the owner's estate and are not subject to any estate taxes if left to a named beneficiary.
Verify what type of IRA account you have inherited. If it's a Roth IRA, no taxes are due on this money when you withdraw the funds. If it's a traditional IRA, you will be responsible for paying taxes on the money when you withdraw it. A 10 percent penalty for early withdrawal is not assessed on any type of inherited IRA account.Step 2
Determine how you will take distributions from the account. If you are inheriting a traditional IRA from your spouse, you can elect to call the IRA your own account and not take distributions until you turn 70 1/2. For a Roth you inherit from a spouse, no distributions are required at any specific time. If you are inheriting the IRA from someone other than a spouse, you can liquidate the account immediately, liquidate it over a five-year period, or take distributions from the account according to your own life expectancy.Step 3
Withdraw the money from the inherited IRA under whichever schedule you have chosen. For example, if the IRS actuary tables say your life expectancy is 30 years, divide the IRA balance by 30 to get your minimum yearly withdrawal if you are using the life expectancy method. The IRA trustee will keep track of the money you withdraw and report it to you at the end of each year.Step 4
Review your Form 1099-R when you receive it at the end of the tax year. The total distribution from the IRA is shown in box 1, with the taxable amount of the distribution shown in box 2.Step 5
Record the amount of total distributions from box 1 onto Form 1040, line 15a, or Form 1040A, line 11A. Enter the taxable amount from box 2 under line 15b or 11b on the corresponding form. The taxable amount is added to other sources of taxable income, with the taxes calculated on your total taxable income, less deductions. Pay any amount due when you file your form. If you had an excessive amount withheld for payroll taxes, you could still receive a refund.
- Be certain to take at least the required minimum distribution from your IRA each year by the end of the year. Failure to do this could result in a 50 percent tax penalty for the amount that you should have withdrawn.
Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.