When you inherit a retirement account, you have a few choices for how you withdraw the money.
First, you can choose to take all the funds out of the account by the time you reach the fifth year after the original account holder passed away.
If you decide to do this, you don't have to get the funds in the form of installments.
Instead, you have to take out all the funds by some time prior to five years after the death of the account owner, in any amounts and at any times you choose.
However, instead of pulling out all the money in five years, you might instead choose to take the RMD annual withdrawals for the course of your life expectancy.
This allows most of the account to grow tax-deferred, while you just take the minimum distributions. This is sometimes called a "stretch IRA."
If you're mean years younger than the account holder was, and you choose the RMD option, you can let the growth of the rest of the account turn into a nest egg you can use later on.
You'll also be able to take out more than the RMD in certain years if you choose to.
Other distribution options?
You can also choose to take out RMDs for the life expectancy of the IRA's oldest beneficiary. This option only applies when the original account holder named multiple beneficiaries for the account.
If by December 31 on the year after the account holder's death, separate accounts haven't been established for each beneficiary, you can choose this distribution option.
Finally, you can decide to cash out the entire account right away when you inherit it. Then, you can use the funds in any way you choose.
This option can look tempting, but it's not always the best choice for tax reasons - more on that in the next section.
You'll need to make sure you don't spend all the funds in the year you cash them out since you'll need to think ahead for your tax bill.
If you don't make a choice as to what to do with your inherited IRA, you'll be forced to choose the first option - cash it all out in five years.
Make your choice by December 31 of the year after the account holder's death so you don't get locked in.