The proper title of an inherited IRA for the stretch

If you've inherited an IRA from someone other than your spouse, here are two choices regarding what you may choose to do with the money.

Choice 1: Cash it out and spend the money. If this is a regular IRA as opposed to a Roth IRA, you will pay income tax on money you withdraw from the IRA. A good guideline is to expect to pay income tax on one of every three dollars you receive from the IRA.

Choice 2: Retitle the IRA and stretch the withdrawals. If you choose to do this, you will be required to make a withdrawal of a "required minimum distribution" amount. Income tax will be owed on the withdrawals. The money that remains in the IRA will continue to grow income tax deferred. This may have the effect of substantially increasing your initial inheritance. The minimum amount you must withdraw each year is determined by the IRS and is computed using an actuarial table based upon your age. In addition to taking the minimimum required distribution, you may also withdraw additional funds as you desire.

If you decide to stretch your inherited IRA, you must properly re-title it. Otherwise the IRS may not permit you to stretch the withdrawals and instead require a speedier withdrawal rate. The title should be as clear as possible so that there is no doubt who the IRA belonged to, why you have it, and who you are.

An example of proper retitling:

Mary Bloom IRA/Deceased 10/12/2009/FBO Virginia Bloom Dahlia

Once the inherited IRA is retitled, check your statements carefully for accuracy in titling. You should check the statement you receive as well as have the institution advise you what wording they are using on the documents they send to the IRS. Finally, check your end of year tax statements to ensure that the proper title is being used on official documents sent to the IRS.