The beneficiary of an inherited IRA must treat distributions from the IRA as taxable income, according to the IRS. Beneficiaries who are spouses have more options on how to handle an inherited IRA and its distributions, but all beneficiaries must take required minimum distributions when necessary or face penalties.
Spouses who inherit an IRA can retitle the IRA in their own name, or roll over the IRA into their present IRA account or a new IRA account in their own name, reports AARP. To avoid penalties, younger spouses must either wait until they are 59 1/2 to initiate distributions or retitle the IRA as inherited. Beneficiaries other than spouses should also retitle the IRA or the shares of each beneficiary when there are more than one, as inherited IRAs. Non-spouse beneficiaries must initiate distributions by December 31 of the year after they inherit, states Forbes. To maximize account growth, these distributions can usually be distributed in equal payments throughout the estimated lifetime of the beneficiaries. Estates that are beneficiaries generally must withdraw all funds within five years.
If the original IRA account holder was 70 1/2 or older and already taking required minimum distributions, beneficiaries must be sure the final distribution is made, says Forbes. Beneficiaries who do not take minimum distributions when required must pay a 50 percent excise tax on the amount that should have been withdrawn, as reported by the IRS.