What Is a Decedent IRA?

You have the most flexibility with a decedent IRA when you inherit it from a spouse. When your spouse leaves his IRA to you, you have three options. You can treat the decedent IRA as your own, you can roll it over into an IRA you already own or you can keep yourself as the beneficiary on the IRA. You can only choose to treat the inherited IRA as your own if you are the only beneficiary on it and if you make contributions to it and do not take distributions.

You might inherit an IRA from a person you were not married to, such as a deceased parent or grandparent. You also have the option of naming your child as the beneficiary on your IRA so he inherits it if you should die. Some decedent IRAs have more than one beneficiary named. For example, you and your minor child might be named on your parent's IRA. If you do not need the money, you can elect to have the IRA skip you and benefit your child. You cannot treat a decedent IRA as your own or make contributions to it if you inherit from someone who wasn't your spouse.

If a beneficiary remains a beneficiary on a decedent IRA, the rules for distributions are slightly different than they are if she transferred the IRA to her own name or cashed out the entire account. With a decedent IRA, the distribution rules for a traditional or Roth IRA become the same if the beneficiary is not the spouse. The beneficiary must begin to take distributions from the IRA by Dec. 31 of the year after the original owner's death. One option is to withdraw the entire amount of the IRA within five years. The other option is to stretch out the amount in the IRA over the life expectancy of the beneficiary. There is no 10 percent early penalty tax on an inherited IRA, even if the beneficiary receives distributions before the age of 59 1/2 years.

When a beneficiary begins to take distributions from a decedent traditional IRA, she will need to pay income tax on the amounts she received. No income tax is due on distributions from a decedent Roth IRA unless the Roth IRA has been open for fewer than five years. For example, if a non-spouse beneficiary inherits a Roth IRA that was only opened three years ago, she will have to pay income tax on the distributions she takes. Traditional IRAs are subject to the estate tax. The beneficiary can claim a deduction for the decedent's estate tax, though. To claim the deduction, she must itemize deductions on her return and complete Schedule A.