J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

8.14 Inherited Traditional IRAs

Although inheritances are generally tax free (11.4), distributions that you receive as a beneficiary of a traditional IRA are taxable. However, if the account owner made nondeductible contributions to the account, distributions allocable to those contributions on Form 8606 are tax free under the rules at 8.9. Taxable distributions received as a beneficiary are not subject to the 10% penalty for distributions received before age 59½ (8.12).

Surviving spouses. A surviving spouse who is the sole beneficiary of a deceased spouse’s IRA may elect to treat the account as his or her own IRA or roll it over (60-day rollover after receiving distribution) to his or her own IRA. By becoming the IRA owner, the surviving spouse determines his or her required minimum distributions (RMDs) under the regular owner rules (8.13), rather than under the beneficiary rules discussed in this section.

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Caution

Nonspouse Beneficiaries Cannot Make a Rollover

If you inherit a traditional IRA from someone other than your spouse, and receive a distribution from the account, you are not allowed to roll it over within 60 days. Once a distribution is paid to you, tax on it cannot be avoided. If you want to change investments without incurring tax, you can use a trustee-to-trustee transfer to send all or some of the funds in the inherited IRA to another investment ...