When you inherit an IRA there is always the option to cash it out completely and take a lump sum of money, but this usually is not the best option. The rules governing an inherited IRA are strict and complicated, so you may need to seek the advice of a professional if you are dealing with a large amount of money.
If you are in a generous mood, you can always give it away. The rules allow you to transfer the IRA to someone else, say a child or grandchild. There are other options, but this is where it gets complicated. What you can do with the money, besides cashing out or giving it away, depends on your relationship to the original owner of the IRA. You can continue contributing to the IRA and take advantage of the tax breaks, though you will have more options if you are left the money from a spouse.
If you are the spouse, you can roll the inherited IRA into your own IRA account and continue contributing as usual. But this option is only available to spouses. If you think you may want to withdraw some of the money before you turn 59 years old, you can roll it into a beneficiary distribution account instead. This account must carry both your name, as well as your departed spouse’s name, but you will be able to withdraw money early without the ten-percent penalty being taken out. If you do roll it over into your own IRA or a beneficiary distribution account, you will be required to start making withdraws when you reach 70 years old. This is not optional.
If you receive the IRA from someone who is not your spouse, you can keep the option to roll the funds into a beneficiary distribution account, but you cannot have it added into your own retirement funds. It is essential that you make sure the financial institution handling the IRA puts the account into both your name and the name of whomever left you the funds-otherwise the money will become taxable in a year. Also, you will be required to take out a certain amount every year (though you can take the minimum and stretch it out over your lifetime if you so choose). And, you will be able to change how the money is being invested if you feel that is necessary.
There are a lot of loopholes and confusing details in the rules for inheriting an IRA account, so make sure you make all of the required withdraws at the appropriate times. Not taking out the money-exactly when it is mandated-can open the door to an unwelcome tax and penalty bill. If you are dealing with a large sum of money, this can get extremely expensive and cause a big financial mess.
While you can turn an inherited IRA into a nice sum of pocket change outright, you will have to pay income tax on the total amount, which will leave you with considerably less money than is due.