Required Minimum Distributions

• To understand the IRS's inherited IRA rules, it's important to understand how required minimum distributions work. RMDs are calculated by dividing an IRA's worth on the previous Dec. 31 by the owner's life expectancy. An IRA trustee can provide you with a year-end fair market value statement. To find the owner's life expectancy, consult tables in IRS Publication 590. Traditional and SEP IRA owners must take RMDs beginning the year they turn 70 1/2. Non-spouse IRA beneficiaries have the option of taking RMDs beginning the year after original owner's death.
  
  

Required Beginning Date

• The IRS calls the year a traditional or SEP IRA owner turns 70 1/2 his "required beginning date." If you inherited a traditional or SEP IRA from a person who was 70 1/2 or older, check with the account's trustee to see if the decedent took his RMD for the year. If he did not, you must withdraw an RMD based on his life expectancy by Dec. 31 the year of his death. Should you fail to do so, the IRS charges an enormous 50 percent penalty on the amount you should have withdrawn.
  
  

Spouse Beneficiaries

• If your spouse named you as the sole designed beneficiary of an IRA, you can treat it as your own. This means you can put the IRA in your name or roll it into your own retirement account. If the account is a Roth IRA, you can contribute to it as long as you live and are not obligated to take RMDs. If you inherit a traditional or SEP IRA, you can contribute to the account until you are 70 1/2, at which point you must begin taking RMDs based on your own life expectancy.
  
  

Required Withdrawals

• If you are a non-spouse beneficiary, a spouse who is not a sole beneficiary of the account or a spouse who chooses not to treat the IRA as your own, you must begin taking withdrawals shortly after the original owner's death. You can either take RMDs based on your life expectancy by Dec. 31 the year following the original owner's death, or withdrawal the entire balance of the account within five years following the original owner's death. If you go with the five-year option, you do not have to make withdrawals before that point.