Uncle Sam has issued new (and improved) rules for tapping an inherited IRA. Here's what you need to know.

So you've inherited your spouse's IRA. What you do now could have far-reaching tax implications. Not long ago the IRS issued new, more generous rules on taking mandatory withdrawals from traditional IRAs. In a recent column, I discussed how these new rules affect your own IRA. The changes also determine how you should take money out of an IRA you inherit from a spouse, and that's today's subject. Play your cards right, and you could now pay significantly less in taxes than you would under the old rules. On the other hand, if you aren't careful, you could wind up making costly mistakes, or worse, get hit with a harsh penalty. (The game has also changed for other inheritors of IRAs, as I'll explain in a later column.)

Fortunately, the new rules are simpler than the old ones. But they're still awfully tricky. (In fact, I want to thank Robin Sproles, CPA, executive editor with Practitioners Publishing Company in Fort Worth, Texas, for consulting with me for this article.) Adding to the chaos, in 2001 you can choose to follow either the new minimum withdrawal rules or the old ones (which have been around since 1987). Starting next year, the new rules become mandatory. In the meantime, you're almost always going to want to go along with the new rules, with a few notable exceptions.

The one thing you cannot do is ignore the whole issue. Why? Because if you fail to withdraw at least the required minimum amount from your inherited IRA, you will be charged a penalty equal to 50% of the shortfall. This is one of the toughest penalties in our beloved tax code. So watch out.

To learn the specifics for your situation, click on the scenario that applies to you.

· Your Spouse Dies Before the Minimum Withdrawl Start Date
· Your Spouse Dies on or After April 1 of the Year After Turning 70 1/2
· You Want to Disclaim the Inherited Account/Your Spouse's Estate Is the Account Beneficiary

Roth IRAs
Keep in mind, the new mandatory withdrawal rules apply to traditional IRAs and inherited simplified employee pension, or SEP, accounts (since they are considered IRAs for this purpose), but not Roth IRAs. Roths are their own breed, and subject to different rules.

If you have inherited your spouse's Roth and you'd like it to continue to grow tax-free, you should transfer the account to your name. Why? Because with Roth accounts you aren't required to take any minimum withdrawals from your account as long as you live. You also don't have to take a minimum withdrawal on behalf of your deceased spouse in the year of his or her death. After that, however, you must begin liquidating the account -- that is, unless you transfer it to your name.