While individuals may be happy to inherit an Individual Retirement Account (“IRA”), confusion may quickly follow. Many who inherit IRA’s are not certain of what to do with them. As a recent article in Forbes points out, there are important tax consequences involved in inheriting an IRA, and therefore important questions that inheritors should ask.
If you are inheriting an IRA from your spouse, you can treat it as your own. Essentially, this means that you can either (1) roll it over into an existing IRA, or (2) put it in your name. Once you inherit the IRA, you can designate who you’d like the beneficiary to be, and can continue to contribute to it. If you decide to put the IRA in your name, it will be treated as though it was always in your name for tax purposes.
Your options change if you are inheriting an IRA from someone other than your spouse. One option for this situation is to deplete the account within the five years immediately following the original owner’s death. The proceeds from the IRA will be taxable unless the account is a Roth IRA. If you don’t need the money, you could also choose to disclaim any assets within the IRA within nine months of the original owner’s death.