IRAs

Withdrawing Money From an Inherited IRA

Learn your options and understand how the distributions will be taxed.

My brother passed away, and I am the beneficiary of his traditional IRA. What are my options for withdrawing the money, and how will the money be taxed?

Your distribution choices depend on whether your brother had begun taking required minimum distributions from the account. If he was older than 70½, the age that triggers mandatory distributions, you have two choices: You can continue to take annual withdrawals based on your brother’s withdrawal schedule, or you can take withdrawals based on your own life expectancy. If he died this year, you have until the end of 2012 to decide.

If you are younger than your brother, take the distributions over your longer life expectancy to minimize your annual distributions, which are taxable, and allow the balance to continue to grow in the tax-deferred account. (You can always withdraw more than the minimum required amount.) See IRS Publication 590, Individual Retirement Arrangements, for details.

If your brother had not yet started to take required minimum distributions, you can either take annual withdrawals based on your own life expectancy or withdraw all funds in the account by the end of the fifth calendar year after his death. The entire amount (except for any nondeductible contributions) will be taxable at the time of withdrawal.

Spouses who inherit a traditional IRA have additional distribution options. They can treat the inherited IRA as their own, rolling over the money into their IRA, which would subject them to all the usual contribution and distribution rules and age limits. Or, a surviving spouse can elect to be treated as a nonspouse beneficiary, allowing her to take distributions from the inherited IRA over her lifetime, starting in the year after the original owner’s death. That could be a good choice for someone who is younger than 59½ to avoid the early distribution penalties she might incur if she rolled the inherited IRA into her own account.

For more information about inherited IRAs, see Maximize and Inherited IRA.

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