Setting up an IRA for yourself can be confusing. However things can get even more complicated when you inherit an IRA. However, as this article from Forbes.com explains, with the right knowledge a family can stretch out the tax breaks of an IRA for decades. They even outline five basic rules for heirs who have inherited an IRA. I have included a few of the rules below, but if you anticipate inheriting a retirement account then I highly recommend going over the full list at Forbes.com.
1. First, do no harm.
If you inherit a retirement account, don't do anything until you know exactly what rules apply. With your own IRA you can take the money out and redeposit it in another IRA within 60 days without penalty. Not so an inherited IRA. All movement of money must be from one IRA custodian to another--be sure to specify a "trustee-to-trustee" transfer. Moreover, unless you've inherited from a spouse, you must retitle the IRA, including the original owner's name and indicating it is inherited, e.g., "Daddy Warbucks, deceased, inherited IRA for the benefit of Little Orphan Annie, beneficiary."
If two or more people are named as beneficiaries, ask the custodian to split it into separate inherited IRAs. That avoids investment squabbles and allows a longer stretch-out for the younger heirs.
2. Beneficiary forms rule.
The beneficiary form on file with the custodian of an IRA controls both whoever inherits the IRA and its ability to be stretched out. If someone other than a spouse is named as heir, they must begin taking distributions from the account by Dec. 31 of the year after inheriting, but they can draw these out over their own expected life spans, enjoying decades of income-tax-deferred growth in a traditional IRA or tax-free growth in a Roth IRA. To give your heirs maximum flexibility, name both primary and alternate individual beneficiaries--say, your spouse as primary and kids as alternates or your kids as primary and grandkids as alternates. Your primary beneficiary then has the option of "disclaiming" or turning down the account, enabling it to pass to the younger alternate.