How does an inherited IRA differ from other inherited wealth?

Because of its tax advantages, an inherited IRA can be a much greater windfall than funds received outside an IRA. Subject to distribution requirements, wealth in an IRA can grow tax-free. But simple mistakes can lead to costly taxes. Your first step should be to seek advice from legal and financial advisers. Here are several other pointers that may help.

1. If you receive an IRA from a spouse, it may be largely like an IRA you already own. You may simply be able to roll it into your existing IRA. You won't have to take "Required Minimum Distributions" ("RMD"s) from the account until age 70 1/2, and if it is a Roth IRA, not even then. As with your own IRA, some distributions taken before age 59 1/2 could be treated as "early withdrawals," subject to penalties.

2. If you are not a spouse, you will have to start taking distributions before age 70 1/2. Non-spouse recipients of an IRA may choose either the "Five-Year Rule" or the "Stretch" approach.

Under the Five-Year Rule, you must liquidate the entire IRA within 5 years of the death of its owner. This can result in high income tax bills, unless it was a Roth IRA, in which case taxes have already been paid. (If the Roth IRA was set up less than five years earlier, distributions could still be taxable.) Once distributed, the proceeds no longer grow tax-free in a sheltered account.

The "Stretch" option allows you to distribute the IRA over the course of your life. This means small annual distributions, based on an IRS table. Funds not distributed continue to accumulate, tax-free, within the IRA.

3. Naming beneficiaries on account forms is critical. If you fail to name a beneficiary on the IRA account form, it may go first to your estate, and your intended beneficiaries will be forced into the Five-Year Rule.

4. Proceed carefully, but don't wait too long. If you don't take distributions when required, there can be harsh penalties. For example, if you are the beneficiary of an IRA from someone who did not take the full RMD in the "year-of-death," you must take it yourself that year. The penalty can be 50% the amount that should have been distributed.

If you choose the Stretch option for distribution the IRA, you must begin taking distributions by the end of the calendar year following the year-of-death or you could be forced into the Five-Year option.

5. Deduct Federal estate taxes, if any. If an estate is taxable  (greater than $5.45 million in 2016), you may be able to deduct estate taxes from income tax paid on your IRA distributions.

These are just some of the issues to consider. When inheriting an IRA, proceed carefully but with all deliberate speed to get professional estateplanning advice and meet each essential deadline.