Non-spouse beneficiaries are NOT allowed to roll an inherited IRA into their own! (Only a spouse can do that.) It must remain in an “inherited IRA” account. Then you have some choices:
- Withdraw it all and pay taxes. This is the stupid choice. You lose the opportunity to keep the money growing for at least 5 years, and you could be pushed into a higher tax bracket.
- Decide to withdraw it all within 5 years of the date of death (December 31st of the 5th year) — paying ordinary income taxes as you withdraw. This only works if the owner had not started taking RMDs. If he/she had, then you must continue taking RMDs on their schedule. You can take the owner’s RMD for the year of death, and choose to recalculate the RMD based on your own age (if younger) for the subsequent years. Ask your inherited IRA custodian for help determining the proper amount.
- Take RMDs over your own life expectancy. If you’re much younger than the person who died, this gives you a chance to STRETCH out the growth of that IRA over many years. This is the smart move. Note: You must take your first RMD by Dec. 31 of the year following the year of the account owner’s death.
But you must “elect” to do this, on a form your inherited IRA custodian will provide. Otherwise you will be defaulted into the 5-year withdrawal plan.