Ask Bob: How to Withdraw From a Beneficiary IRA

Question: I have a beneficiary IRA valued at $36,000. I am wondering if I should take it all out and pay taxes on it. I don't need the money.

Answer: It's tough to answer your question with the limited information available, says Beverly DeVeny, director of retirement education at Ed Slott and Company, but here are some factors to consider.

According to DeVeny, an inherited IRA can be distributed in full at any time with no penalty under the tax code. "But the distribution will be included in your ordinary income for the year," she says. "And, it could potentially put you in a higher tax bracket, make you subject to AMT, impact your exemptions and phase-outs, increase the taxability of your Social Security payments, and increase your Medicare premiums. It could also impact higher education financial aid.

In other words, she says, anything that could be affected by increased income.

"On the other hand, if you leave it in the inherited IRA and take only RMDs each year, the account could continue to grow for many years before you are taking out more than the growth on the account," says DeVeny. "You could earmark the RMDs for special items such as a family vacations or enrichment activities, school fees for children, or for practical items such as paying down credit card debt. The choice is up to you."

Editor's note: One of Retirement Daily's guest contributors, financial adviser David S. Dixon, explains how to manage inherited IRA money to maximize benefits and minimize taxes in the article, How to Turn an Inherited IRA Into a Family Fortune.