Q: What are my options if I inherit an IRA or benefit from an employer-sponsored plan?
A: You may not have given much thought to inherited IRAs in the past, but there is a good chance that you have or will someday inherit an IRA in the future.You can always take a lump-sum distribution, but that’s usually not the best idea. Although a lump sum provides you with cash today, it can also result in a huge income tax bill. A lump-sum distribution also removes the funds from a tax-deferred environment. Fortunately, you have other alternatives. So what are your options?
If you are a surviving spouse, you can roll over funds into your own traditional IRA or retirement plan. If you’re the sole beneficiary you can also leave the funds in an inherited IRA and treat it as your own, and defer taking distributions until age 70. You can also convert non-Roth distributions from an employer plan into a Roth IRA, but you will likely have to pay tax upon the conversion. You can also opt for one of the non-spouse choices, though these choices are often less advantageous.
Nonspouse beneficiaries have four choices.
1. You can take a lump sum distribution, which is typically fully taxable.