If a loved one leaves you an IRA, you will need some help to figure out how to handle it. The rules vary depending on which kind of IRA and how you were related to the person who died. For example, your choices for what you can do with an inherited IRA depend on whether it’s from your spouse or from someone else. Also a factor: If the account holder died too young to have begun taking required minimum distributions.
Inherited from a Spouse
A spouse who inherits an IRA can either move the money into a new or existing Traditional or Roth IRA in their name—or put it into an inherited IRA. An inherited account can also be “disclaimed” for estate planning purposes. Talk to an attorney if you want to leave the money to your heirs.
Just as in a regular conversion, moving money from a non-Roth IRA to a Roth will require you to pay taxes on the amount converted—that could be a big hit with a large account.
If a Roth isn’t for you, choosing between a Traditional and inherited IRA depends largely on your age and your immediate financial needs. If you’re older than 70½ and the deceased spouse was younger, an inherited IRA allows you to delay required minimum distributions until the year the spouse would have turned 70½. Traditional IRAs are better for widow(er)s who are younger than their spouses and younger than 70½— they can delay distributions until that time.
If you inherit an IRA from a spouse, are younger than 59½ and need the money right away, go with an inherited IRA. You won’t be subject to a 10 percent early withdrawal penalty.
Inherited from Someone Other than a Spouse
If your Aunt Millie (or your mom) leaves you her IRA assets, your options are more limited than if you had received them from a spouse. You’re required to begin taking minimum distributions the tax year after the person dies; the amount is determined by a formula based on your life expectancy, as defined by the IRS).
You can also liquidate the account entirely and pay taxes on the income.