I am the beneficiary of my mother's IRA. What options do I
have for withdrawing the money when she passes away?
You have several options when you inherit an IRA, and the one
you choose can have a big impact on how much you pay in taxes. The
rules are different for spouses than for nonspouse beneficiaries.
They're also different for traditional IRAs than they are for
Roths, which generally are not taxed when left to heirs.
If you inherit a traditional IRA, you can cash out the account
at any age -- even before you reach age 59½ -- without having to
pay a 10% early-withdrawal penalty. But you will have to pay taxes
on the money in the account (except for any nondeductible
If nonspouse beneficiaries don't start taking withdrawals by
December 31 of the year after the IRA owner dies, then they must
withdraw all of the money in the account within five years.
Otherwise, you must take minimum distributions from the account
based on your own life expectancy, starting by December 31 of the
year after the original owner's death. These required withdrawals
are similar to the required minimum distributions (RMDs) for IRA
holders over age 70½, but they use a different life expectancy
table. The withdrawals will still be taxable (except for any
nondeductible contributions), but the rest of the money can
continue to grow tax-deferred in the account.
Spouses who inherit a traditional IRA have extra choices. They
can roll the money into their own IRA, so they don't have to start
taking required minimum distributions (based on their life
expectancy) until they reach age 70½. But they'd have to pay a 10%
early-withdrawal penalty for money they take from the account
before age 59½.
If the original IRA owner was 70½ or older and had already
started taking RMDs before he or she died, then the beneficiary can
continue to take annual withdrawals based on the original owner's
life expectancy schedule or take withdrawals based on his or her
own life expectancy.
The rules are different for Roth IRAs, which can usually be
inherited tax-free. But you can't keep the money in the account
forever. Original Roth IRA owners don't have to take required
minimum distributions, but nonspouse heirs have to take annual
distributions from the account based on their life expectancy,
starting the year after the original IRA owner dies (spouses have
the option of rolling a Roth into their own account). Or you can
withdraw all of the money in the account within five years. Either
way, you generally won't have to pay taxes on the withdrawals.
For more information about these rules and the IRS
life-expectancy tables for required withdrawals, see
IRS Publication 590
, "Individual Retirement Arrangements."