• Non-spouse inherited IRAs can be managed to effectively shelter heirs from excessive taxation.generationen image by pdesign from Fotolia.com
  
  Non-spouses who inherit individual retirement accounts (IRAs) don't have the range of options that spouses do. They cannot contribute money to the account, and must start withdrawing money from it one to five years following the account owner's death. In other words, they are not entitled to the full range of an IRA's tax benefits. However, with some smart planning, they can use the account to shelter their inherited funds for many years.
  
  

Non-Spouse Options

• Non-spouses who inherit IRAs can either withdrawal the money in a lump sum up to five years after the account holder dies, or begin taking required minimum distributions (RMDs) by December 31 the year after the owner dies. This is true of any non-spouse inherited IRA, including Roth IRAs--the type that do not require account owners to take RMDs in their lifetime. This means that non-spouses cannot treat the IRA as their own, or roll it into their own retirement accounts.
  
  

Required Minimum Distributions

• RMDs are calculated by dividing the account's worth by the beneficiary's life expectancy the year following the account holder's death. The IRS publishes handy tables where beneficiaries can look up how many years the agency thinks they are likely to be around. The RMD for each subsequent year is calculated by dividing the IRA's worth by what the beneficiary's life expectancy was the previous year, minus one.
  
  

Splitting IRAs

• IRA owners can name multiple beneficiaries. In this case, the people who inherited the account could simply split it into multiple accounts and pursue their own distribution and investment strategies. It also allows RMDs to be calculated according to each beneficiary's life expectancy--otherwise, if multiple people were to remain on one account, the RMD's would be calculated according to the oldest beneficiary's life expectancy.
  
  

Alternate Beneficiaries

• Account owners can give their heirs maximum financial planning flexibility by naming alternate heirs to an IRA. This allows the primary heirs to decline an IRA inheritance in favor of the alternates, which could be a big tax advantage if the alternates are younger. Younger beneficiary's would be obligated to take relatively small RMDs that are spread out over their entire lives.
  
  

Penalties

• If beneficiaries don't take their full annual RMD, the IRS charges a 50-percent penalty on the amount left in the account that should have been withdrawn.
  
  

Taxes

• Beneficiaries of a Roth IRA don't have to pay income taxes on any of the distributions, provided the account has been open at least 5 years. Those who inherit a traditional IRA do have to pay income taxes on the distributions, though the money is still allowed to accumulate tax-free. Those who take a traditional IRA in a lump sum should be aware that, because the money will likely bump them into a higher tax bracket, a considerable portion of the account would be eaten up by taxes.