Procedures for inheriting IRAs depend on the type of IRA and your relationship to the deceased, but there are several ways for you to put the money in your hands. Since a traditional IRA is funded with pre-tax dollars, you'll be responsible for the taxes on the inherited account, while you won't have to pay taxes on a Roth IRA. Another factor that plays into your handling of the account is the RMDs or required minimum distributions, that have or have not been taking from the account.
Once you've researched these things, you can determine which of the ways to cash out an inherited IRA will work best as an IRA beneficiary.
Rollover Options for Inherited IRA
If you are the spouse of the deceased, you are entitled to special benefits that non-spousal beneficiaries don't receive. You can rollover the funds from the account into your current IRA accounts or into a new IRA account, then continue to let the money grow until you are ready to receive benefits or reach age 72, at which point you must begin to take payments.
Once you do this, though, the government treats the money as your own IRA, and you will pay a 10 percent penalty for withdrawing before age 59 1/2. If you want the money now, you can cash out the account – which can trigger taxes – or take smaller distributions by treating it as a beneficiary account.
Read More: Can an Inherited Annuity Be Rolled Over Into an IRA?
Beneficiary Distribution Account
Both spouses and non-spousal beneficiaries can turn the inherited IRA into a beneficiary distribution account. In this case, you'll receive yearly payments based either on fully cashing out the IRA within 5 years or on stretching the amount out for your projected life expectancy. Both options spread the tax burden out rather than paying all at once on a lump-sum distribution. It also allows non-spouses the opportunity to transfer the fund to another institution and change the investments within the account.
Lump Sum Distribution
As a beneficiary you can cash out the full value of the IRA, even if you are not yet 59 1/2, without paying a 10 percent penalty. If you choose this option for a traditional IRA, however, you will have to pay taxes on this sum. If there is a considerable amount of money in the IRA, cashing out may push you into a much higher tax bracket than you would normally be in. It's wise to talk to a tax professional about the implications for you before moving forward to cash out an inherited IRA with this option.
Read More: Required Distributions for an Inherited IRA
Implications for Roth IRAs
For spouses, Roth IRAs do not have a specific time frame for minimum distributions, so it's possible to rollover the money into your own IRA and let it sit there indefinitely. If you are a non-spousal beneficiary, though, you must ether take the full distribution within five years or spread out the distributions over your life expectancy. In either case, you will not be responsible for income taxes or a penalty for taking distributions prior to age 59 1/2.
Maggie McCormick is a freelance writer. She lived in Japan for three years teaching preschool to young children and currently lives in Honolulu with her family. She received a B.A. in women's studies from Wellesley College.