The immutable truth about death and taxes means that someday you just might inherit an IRA from a loved one.

While the rules about inheriting IRAs aren’t that complicated or intuitive, it pays to be aware of the details in order to avoid one of the tax traps you may fall into while you are still grieving and not thinking clearly.

• If you inherit an IRA from a spouse, it carries on in your name as if it’s your own, with the same required minimum distribution (RMD) rules set by the IRS. In addition, you can roll it into another IRA that you have.

Remember: Make sure that you take the RMD for the year that the owner died if he or she didn’t already. Otherwise, you will get socked with a 50% penalty of the RMD!

• An inherited IRA that wasn’t your spouse’s (say, that of a parent or other relative) is a bit trickier. You have until the end of the calendar year following the owner’s death to choose one of two methods of distributions: the “Stretch” method or the “Five-Year” method.
• The “Stretch” option requires you to take distributions over the course of your life expectancy according to the IRS tables. As one example, if you inherited a $1,000,000 IRA and you were 55 years old, the IRS thinks you’re going to make it to nearly 85, so your first RMD would be about $34,000 annually, or 3.4%, according to the IRS worksheet.
• The Five-Year option requires you to liquidate the entire inherited IRA within five years. This means you can wait a bit to take it and do your tax planning before making your decision. Or maybe the market dips and the value of the IRA goes down—you might take advantage of that to withdraw the assets when they shrink.

Remember: If you don’t choose one of the options by the deadline, the default is the Five-Year method (no surprise that Uncle Sam wants his cut sooner rather than later).

Being prepared for the financial planning decisions that arise when a loved one passes away helps eliminate some of the stress during a trying time. Seeking the advice of a wealth advisor and accountant will help get you through what can be a difficult chapter in anyone’s life.