What are my options if I inherit an IRA or an employer retirement savings plan account?
If you don't want the money, you can always disclaim (refuse to accept) the inherited IRA or plan funds. But if you're like most people, you will want the money. Your first thought may be to take a lump-sum distribution, but that's usually not the best idea. Although a lump sum provides you with cash to meet expenses or invest elsewhere, it can also result in a huge income tax bill (in most cases, due all in one year). A lump-sum distribution also removes the funds from a tax-deferred environment. Fortunately, you probably have other alternatives.
If you are the designated beneficiary (i.e., you are named as beneficiary in the IRA or plan documents), you can take distributions over your remaining life expectancy, which spreads the income and tax liability over a number of years. You must calculate the annual required minimum distribution (RMD) amount that must be withdrawn each year using IRS life expectancy tables. (You can always withdraw more than the minimum amount in any year, but you will generally be subject to a 50% tax penalty on any required amount that is not withdrawn.) Yearly distributions from the IRA or plan must begin by December 31 of the year following the year of the original account owner's death. If there are other designated beneficiaries and separate accounts have not been set up, the oldest beneficiary must be used for the life expectancy calculation. (Note: An employer-sponsored retirement plan can specify the distribution method that beneficiaries must use.)