As the American workforce continues to transition away from the traditional pension plans and into individual retirement plans such as 401(k)s, 403(b)s and the like, another form of retirement account is becoming more and more prevalent, the beneficiary or inherited IRA.

Sometimes referred to as the “stretch IRA,” it's important to be aware of the unique characteristics of these IRAs. In particular, the balance of this article will deal with what happens when you inherit an IRA from someone other than your spouse.

There are several general misconceptions that we commonly face when dealing with an inherited IRA.

First is that assets must be transferred via a trustee-to-trustee transfer. If funds are distributed out to a beneficiary, they cannot be rolled over to a stretch IRA and will be subject to income tax.

Second, regardless of age, the beneficiary must begin to take required minimum distributions no later than Dec. 31 of the year following the death of the original owner. The amount of the distribution is determined by the account balance and the age of the beneficiary and must be recalculated on an annual basis using The Single Life Expectancy Table published by the IRS.

While these minimum distributions are subject to income taxes, it should be noted that again, regardless of age, the annual distributions are not subject to the 10 percent early withdrawal penalty that one would incur if taking money from a traditional IRA before the age of 59½.

It should also be noted that while annual distributions are not required to be taken from Roth IRAs during the owner's lifetime, an Inherited Roth IRA is subject to the same minimum distribution rules only the payments are not subject to income taxes.

Failure to follow any of the above can result in penalties of up to 50 percent of the required amount.

As a final note, it's extremely important that to inherit an IRA the original owner needs to specifically designate individuals as beneficiaries. Many times we see beneficiary designations that refer to wills or trusts.

In most cases such designations preclude the intended beneficiaries from taking advantage of the “stretch” in an inherited IRA.

Lyric McCandless Schnur is an associate vice president and financial adviser with Hefren-Tillotson. She can be reached by phone at 724-283-3788 Ext. 2505 or by e-mail at lyric.schnur@hefren.com.

James A. Beck, CFP, is a first vice president and financial adviser with Hefren-Tillotson. He can be reached by phone at 724-283-3788 Ext. 2104 or by e-mail at james.beck@hefren.com.

This article was submitted by Hefren-Tillotson.