You don't have to accept an inherited IRA if you don't want to. Even if the account owner named you as a beneficiary, you can say "No" and let your inheritance pass to the next person in line. Common reasons are the effect on your taxes, or that the contingent beneficiary needs the money more — but as long as you follow the IRS guidelines, any reason that works for you is good enough.
To waive your rights to the IRA, or part of the IRA, you have to submit a disclaimer to the plan administrator within nine months of the account owner's death. If you've already started withdrawing money, you're stuck: You've waived your right to waive, and the IRA is now yours. Once you file your waiver, you have no say in who the account passes to next: Legally you never owned the IRA assets, so you have no control over them.
What Happens Next
When the account owner names a contingent beneficiary — your sibling, for instance — the disclaimed assets pass to him. If the owner used more general phrasing — the assets go to all her children and grandchildren, say — then the other descendants divide up your share. If the IRA doesn't have a contingent beneficiary, the money goes wherever state law dictates. Often it ends up back in the deceased's estate and gets divided up in probate.
One reason to disclaim an IRA or other inheritance is heavy debt. If you accept the money, your creditors take everything; if you disclaim, they get nothing. This may not work: Judges in some bankruptcy cases have ruled that disclaiming to thwart creditors is fraud. In 2011, however, a Texas court ruled that as IRAs are safe from the owner's creditors, the assets are also safe from the beneficiary's creditors. If courts outside Texas adopt the same reasoning, that would give heirs one less reason to disclaim an IRA.
You can disclaim a Roth IRA just like a traditional IRA. Withdrawals from a Roth are tax-free, so taxes shouldn't be an issue in your decision. Once you disclaim a traditional or a Roth account, the decision is irreversible. Should you lose your job in a year, you can't turn around and get your inheritance back. If you know you're a beneficiary, talk to the account owner about naming a contingent beneficiary as well. Even if you don't intend to disclaim, it's a good move, in case you die before the owner does.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.