Some people mistakenly believe the rules are the same for withdrawing from an IRA you inherited and one you initiated.
The age of 70 ½ is the deadline for withdrawing from an IRA you created on your own and one you inherited from a spouse. However, a withdrawal from an IRA inherited from someone other than your spouse has an earlier deadline and some pretty stiff penalties if the rules aren't followed.
Here are the basic rules:
- You must begin to take required minimum distributions the year after the IRA creator's death. This amount varies depending on the beneficiary's age. You can take more than the minimum amount, but everything withdrawn counts as income for income tax purposes. If you do not take the minimum amount, you will be assessed a 50% penalty and the amount you should have taken out will still count as income for tax purposes.
- There is an exception to the above if the IRA creator passed away before the age of 70 ½. You do not have to take a required minimum distribution as long as you take all the money out of the IRA within five years.
- If you make a mistake and do not take a distribution when you are required to do so, you can fix the error and apply to the IRS for a waiver of the penalties. As this can be complicated you should seek the advice of a professional.
Reference: News & Observer (Feb. 27, 2016) "Money Matters: Sibling seeks advice after inheriting brother's IRA."