The Internal Revenue Service, or IRS, requires that a person who inherits an individual retirement account, or IRA, takes out a minimum distribution amount each year based on the beneficiary's life expectancy or withdraws all the funds within 5 years of the original owner's death, states Vanguard. The latter option is not subject to the required minimum distribution rule while those using the first option have to withdraw the minimum annually to avoid tax penalties.Continue Reading
For those who use the life expectancy method, the IRS has tables that helps beneficiaries calculate the minimum they have to take out of the IRA account each year. Rules dictate not only the amount to be taken out but also the deadline for doing so. For example, the first minimum usually is due at the end of the year following the owner's death, notes Fidelity. If this deadline is missed or the beneficiary takes out less than required, the beneficiary pays a 50 percent tax on the required minimum amount.
Those who opt for the 5-year option don't have to worry about required minimum distributions each year, but do have a 5-year deadline for withdrawing all of the IRA's funds. As long as all of the funds are withdrawn by the end of 5 years, the beneficiary can take out money at any time. However, there can be penalties if funds remain at the end of 5 years, warns Fidelity. Furthermore, withdrawals within the 5 years are taxable.Learn more about Financial Planning