There are three things that we would like for you to know about Inherited IRAs:
When an IRA owner dies, the IRA proceeds are payable to the named beneficiary --or to the owner's estate if no beneficiary is named. If you've been designated as the beneficiary of a traditional or Roth IRA, it's important that you understand the special rules that apply to "Inherited IRAs."
It's not really "your" IRA
While you do have certain rights, you are generally not the "owner" of an inherited IRA. Thus, you can't mix inherited IRA funds with your own IRA funds, and you can't make rollovers to or from the inherited IRA. The taxable portion of any payments and the amounts of any required minimum distributions must be calculated separately as well. But, if you inherited the IRA from your spouse, you have special options. You can take ownership of the IRA by rolling it into your own retirement account, or if you are the sole beneficiary, you can treat the inherited IRA as your own. As the new IRA owner (as opposed to beneficiary), you won't need to begin taking RMDs from a traditional IRA until you reach age 70½, and you won't need to take RMDs from a Roth IRA during your lifetime at all.
Required minimum distributions
As beneficiary of an inherited IRA, you must begin taking RMDs after the owner's death.* In general, you must take payments from the IRA annually. But, if you're a spousal beneficiary, you may be able to delay payments until the year the IRA owner would have reached age 70½. In some cases you may be able to satisfy the RMD rules by withdrawing the entire balance of the inherited IRA (in one or more payments) by the fifth anniversary of the owner's death. In almost every situation, though, it makes sense to use the life expectancy method instead--to stretch payments out as long as possible and take maximum advantage of the IRA's tax-deferral benefit.
Federal income taxes
Distributions from inherited IRAs are subject to federal income taxes, except for any Roth or nondeductible contributions the owner made. But distributions are never subject to the 10% early distribution penalty, even if you haven't yet reached age 59½. When you take a distribution from an inherited Roth IRA, the owner's nontaxable Roth contributions are deemed to come out first, followed by any earnings. Earnings are also tax-free if made after a five-calendar-year holding period, starting with the year the IRA owner first contributed to any Roth IRA.
*If the traditional IRA owner died after age 70-1/2 and did not take an RMD for the year of his or her death, you must also withdraw any remaining RMD amount for that year.