Nonspouses are able to withdraw funds from an inherited IRA immediately or within five years of inheriting the account, reports Julie Garber for About.com. Alternatively, they can create an Inherited IRA, also known as a Stretch IRA, and receive required minimum distributions or larger distributions over their lifetimes.Continue Reading
Nonspouses who inherit IRAs are not allowed to treat the accounts as their own and roll over any funds into or out of the account, according to the Internal Revenue Service. Unless they create an Inherited IRA, they must withdraw the entire amount from the IRA by Dec. 31 of the fifth year after the death of the IRA owner, states Dana Anspach for About.com. Although nonspouse inheritors are allowed to cash out the entire amount at once without penalty, they must pay income tax on the distribution, which may cause them to fall into a higher income tax bracket.
Creating an Inherited IRA account enables beneficiaries to allow most of the funds in an IRA to grow tax-deferred, explains Garber. Beneficiaries must withdraw yearly required minimum distributions calculated on the amount in the account and their estimated lifetime based on an IRS table, states the IRS. If they do not withdraw at least the required minimum distribution each year, the IRS imposes a penalty tax of 50 percent of the amount that should have been distributed.Learn more about Financial Planning