As this discussion shows, the rules depend on:
- whether or not this is your spouse (if your spouse, usually the best option is to "assume" it -- aka take it over and it's like a regular IRA for you -- but then the traditional penalties for early withdrawal apply.)
If it's a non-spouse beneficiary, then you have some choices:
- inheriting it
- disclaiming it (passes to next beneficiaries)
With inheriting it, you can:
- take out all of it over 5 years
- stretch out the required minimum distributions over your lifetime (or the deceased account owner's previously expected lifetime, if you are older than the person who passed) (Also, if you are a person or a trust, you should be able to do this. Special rules for charities and the like.)
I was a bit wrong above -- both traditional and Roth IRAs require RMDs if passed to non-spousal beneficiaries.
Usually with traditional inherited IRAs, you'll want to do the stretch IRA to reduce taxes. In this case, it's super important to stay on top of the RMDs including for the year the person passed. Not taking them can trigger the 5 year distribution schedule and the penalty on missed RMD money is 50%! Yes! That sucks. You can also take more than the minimum any time you'd like. As Spork said, having too much in the traditional IRA in retirement means you could have a bigger tax bill, so it might make sense to take out extra in lower income years.
Roth inherited IRAs are more complicated since you don't have to pay taxes on the withdrawals. To keep the Roth benefits as long as possible, use the stretch IRA. But you could make a case for withdrawing over 5 years to use for some other purpose and there would be no negative tax consequences. Once again a 50% penalty can apply for not withdrawing the RMD, including the one for the year the IRA owner passed away.
If you have multiple beneficiaries, it's more complicated. Basically best case scenario is that everyone has their shit together and opens their own accounts and the RMDs are calculated individually instead of on the oldest beneficiaries' age.