• Inheriting money in an account established as a traditional Individual Retirement Arrangement (IRA) is about as complicated as it gets. When you are the beneficiary, you must make important decisions regarding transfer of the money from the decedent's IRA to you. The answers to two questions will underlie your decisions: Who left the money to you? What are the deadlines regarding your options to take possession of the money? Making the right decisions should result in tax savings.
  
  

Decedent's Spouse

• Different tax rules apply to the decedent's spouse than apply to any other beneficiary of the decedent's IRA. A spouse has the option to change the account to her name and treat it as her own, or transfer the funds to her existing IRA account. This is a significant tax advantage that should not be overlooked during estate planning. For example, if the decedent makes a trust the beneficiary of the IRA account--even a living trust established by both spouses--there is a risk that this roll-over option for the spouse will be lost.
  
  

Other Beneficiaries

• If the decedent was not your spouse, the money in the IRA is still yours, but you cannot treat the IRA account as your own or roll it over into your IRA account. But you still have choices to make, such as when and how much distribution to take from the account. As with the decedent's use of the IRA, you do not owe taxes on the money in the account until you take distributions. A further similarity is that there are required minimum distribution rules (usually referred to as "RMD") that all beneficiaries have to follow.
  
  

Distribution Options

• IRS regulations interpreting the federal tax code give you two options for taking a distribution of the money in an inherited IRA account. The first applies if the decedent died before he started to take his RMD from the IRA account. In this case, the money from the account can be distributed to you by Dec. 31 of the fifth anniversary year from the decedent's death, or you can choose to have the money distributed over your expected life span. The second option applies if the decedent was taking his RMD at the time of death. You can continue to take distributions from the remaining life expectancy of the decedent (as determined by IRS life expectancy tables) or your life expectancy, whichever is longer. Under either option, distributions from the account will be reported and taxed as "death distributions," not as IRA distributions.
  
  

Professional Advice

• The complexity of the tax rules for handling an inherited IRA requires advice from a qualified professional---who is not necessarily the custodian of the IRA account. Sometimes the rules of the custodian's institution differ from what is permitted by the IRS. For example, some custodians require a beneficiary to take a full distribution of the IRA account within a year of the decedent's death. In this case, you will need to find an institution that will handle the funds to meet your needs, and finding a professional adviser to assist you is a good first step.