Inheriting IRA money
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wilkersk
Pattern Altitude
You don't have to take a lump-sum distribution. There are a couple of different options.
If you are the spouse, you can transfer it to your name and treat it as your own IRA.
If not a spouse, you may be able to use the benefactor life-expectancy method and begin drawing taxable RMDs based on based on benefactor's age at time of death.
Or, you may be able to use the 5-year method and pay taxes on distributions in the year they are withdrawn. All funds must be distributed at the end of 5 years.
If you are the spouse, you can transfer it to your name and treat it as your own IRA.
If not a spouse, you may be able to use the benefactor life-expectancy method and begin drawing taxable RMDs based on based on benefactor's age at time of death.
Or, you may be able to use the 5-year method and pay taxes on distributions in the year they are withdrawn. All funds must be distributed at the end of 5 years.
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denverpilot
Tied Down
There’s three ways to handle that with an inherited IRA to a non-spouse. (Inherited IRA means the person or persons was listed as a beneficiary of the IRA while the decreased was alive...) under the Required Minimum Distribution rules.
Life expectancy ... some variants of this how it works depending on if the deceased reached their own RMD date and was withdrawing or not yet, but generically — the inheritor opens an Inherited IRA account and draws down the money in the account over the IRS’ lifetime expectancy, paying taxes on each annual withdrawal. Meanwhile the money can stay inside the new IRA and continue to grow.
5-year rule ... the inheritor opts to speed up the above process and chooses a mandatory 5 year option.
Or the one not really listed in the rules... because either of the above allow for this at any time... full withdrawal and payment of taxes in the current year.
Usually the best option for growth is the life expectancy option. However... withdrawal and reinvestment into a Roth after paying taxes can also beat the lifetime withdrawal for certain age groups of inheritors.
The RMD rules for spouses are slightly different. As are the RMD rules for an inheritor who received the IRA via “non-qualified” means, meaning they weren’t listed as the beneficiary but Probate or other legal means dropped it in their lap. For non-qualified the rule is almost always the five year rule. For spouses the dates for RMD calculations can change because the IRS assumes it’s more like “our” retirement money than “inherited”.
In all cases, consulting a tax pro who can do the math on all three options is wisest. The tax situation of the recipient has to be taken into account to decide which RMD option is the best.
The biggest scam is inherited Roths. Taxes were already paid that money when the deceased was alive and IRS gets a double dip on it after their death from the inheritors.
There’s dates and deadlines so don’t wait too long on meeting with a tax professional if you expect to receive an inherited IRA. Most of the time the decision as to which RMD option is being taken is due by Dec 31st of the year following the deceased’s death, as well as the first withdrawal made or penalties of up to 50% of the mandatory withdrawal can be assessed.
There’s also a bunch of messy rules for a Trust inheriting an IRA besides all of these messy rules for individuals.
Honestly, if anyone ever says that you’re receiving an IRA as an inheritance you need to call a tax professional, yesterday.
A well meaning and busybody executor can REALLY screw this up, too. Example: They force the withdrawal of the entire IRA before consulting with multiple inheritors who may have wanted to start Inherited IRA accounts without “touching” the money and triggering possible taxes.
A good tax accountant still should be able to write letters to IRS and straighten that out for a price. IRS then gets to sit on said letter for half a year or more if they like and decide if they’ll accept the refining of that individual’s taxes and the move to put the money back into an Inherited IRA. Usually they’ll say yes, but it can take half a year to know if they accept the “The executor screwed this all up” letter. LOL.
Life expectancy ... some variants of this how it works depending on if the deceased reached their own RMD date and was withdrawing or not yet, but generically — the inheritor opens an Inherited IRA account and draws down the money in the account over the IRS’ lifetime expectancy, paying taxes on each annual withdrawal. Meanwhile the money can stay inside the new IRA and continue to grow.
5-year rule ... the inheritor opts to speed up the above process and chooses a mandatory 5 year option.
Or the one not really listed in the rules... because either of the above allow for this at any time... full withdrawal and payment of taxes in the current year.
Usually the best option for growth is the life expectancy option. However... withdrawal and reinvestment into a Roth after paying taxes can also beat the lifetime withdrawal for certain age groups of inheritors.
The RMD rules for spouses are slightly different. As are the RMD rules for an inheritor who received the IRA via “non-qualified” means, meaning they weren’t listed as the beneficiary but Probate or other legal means dropped it in their lap. For non-qualified the rule is almost always the five year rule. For spouses the dates for RMD calculations can change because the IRS assumes it’s more like “our” retirement money than “inherited”.
In all cases, consulting a tax pro who can do the math on all three options is wisest. The tax situation of the recipient has to be taken into account to decide which RMD option is the best.
The biggest scam is inherited Roths. Taxes were already paid that money when the deceased was alive and IRS gets a double dip on it after their death from the inheritors.
There’s dates and deadlines so don’t wait too long on meeting with a tax professional if you expect to receive an inherited IRA. Most of the time the decision as to which RMD option is being taken is due by Dec 31st of the year following the deceased’s death, as well as the first withdrawal made or penalties of up to 50% of the mandatory withdrawal can be assessed.
There’s also a bunch of messy rules for a Trust inheriting an IRA besides all of these messy rules for individuals.
Honestly, if anyone ever says that you’re receiving an IRA as an inheritance you need to call a tax professional, yesterday.
A well meaning and busybody executor can REALLY screw this up, too. Example: They force the withdrawal of the entire IRA before consulting with multiple inheritors who may have wanted to start Inherited IRA accounts without “touching” the money and triggering possible taxes.
A good tax accountant still should be able to write letters to IRS and straighten that out for a price. IRS then gets to sit on said letter for half a year or more if they like and decide if they’ll accept the refining of that individual’s taxes and the move to put the money back into an Inherited IRA. Usually they’ll say yes, but it can take half a year to know if they accept the “The executor screwed this all up” letter. LOL.
hankrausch
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GoodbyePOA
I am exactly in this position, executor forced a lump sum distro. Eye watering amount of tax! Fortunately I am allowed to put a lot of money in a SEP and that shielded all of it. But if I had not had that SEP it would have been painful. Pros and cons working for oneself but SEPs are def a plus.
PaulS
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If you have or get money you pay taxes, your fair share.
Anymouse
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Total Stud Bush Pilot
I'm not so sure about the "fair" part.
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3G
Not always. Life insurance beneficiaries come to mind...
PaulS
Touchdown! Greaser!
True, and if the executor does the estate correctly the taxes get paid before the beneficiaries do if the executor thinks that would be better for the beneficiaries. I'm always amazed when people get upset about paying taxes, our government is run off of taxes and it is getting bigger by the minute. Taxes are a fact of life, if you earn or inherit money, in most cases taxes need to be paid.
bflynn
Final Approach
Aren't inheritance taxes only relevant to estates valued at more than 5 million dollars (Federal) and then dependent on state laws?
Checkout_my_Six
Touchdown! Greaser!
cept IRA money is non-taxed....that's why the feds want their payola. Now if we're talking about a ROTH....that would be tax free.
gkainz
Final Approach
so if the executor of the estate (also the Power of Attorney for same) is not named as the beneficiary of IRAs, and the owner is still alive, would it be generally better for the executor to be named as the beneficiary? I assume the answer is always ... "depends"?
Odds are that the nursing home with be the recipient of all of the funds at this point, anyway.
Odds are that the nursing home with be the recipient of all of the funds at this point, anyway.
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3G
Yes, it depends. And that’s why estate planning is a good thing.
Everskyward
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Everskyward
If it's a regular IRA, the decedent deferred the taxes to begin with, and would have had to pay taxes if they had been alive to withdraw it.
PaulS
Touchdown! Greaser!
Yes, but regular income taxes and state taxes are due. Stocks basis generally resets to the date of death, but if the stocks are cashed and the stocks appreciate then taxes must be paid, plus any income earned.
In my dealings with this, if the money is distributed in the year the estate is closed out, then k1s ? (or 1099s?) must be done and any taxes due by the estate paid by the beneficiaries. With my mom's estate, we held the money, cashed the stocks, paid the taxes then distributed the money the next tax year in which no taxes were owed. It depends on the sophistication of the beneficiaries, if people are used to paying taxes and are disciplined enough to be sure they have enough money to pay the taxes after the distribution, then go the k1 (1099?) route.
FormerHangie
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Score one for the Roth.
Everskyward
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Everskyward
I think where people are confused is that the estate itself is not taxed if it's over 5 million (plus change). However, the individual who inherits owes income tax if what they inherit appreciates during the time they own it (from decedent's date of death to when they sell it). Normal IRAs are different, as was outlined in this thread, since the person who inherits doesn't get the stepped up basis.
kontiki
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Kontiki
In the situation I found myself in, the executor of the estate, had lumped money from all accounts, divided it x ways and sent everyone a money transfer last June. No one knew any of it had come from an IRA. Come tax time this year, her tax guy realizes the situation, and in order to avoid her picking up the tax liability, needs to sent out forms to all the recipients, but they don't have all the SSNs. So she files an extension. As a recipient, I now file for an extension, and estimate my tax liability based on numbers I got from her guy over the phone. I'm in a bad, good situation. My taxes are simple, I have no debts or deductions. I don't believe I have any options here.
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PaulS
Touchdown! Greaser!
That's why I paid a lawyer and an accountant for the estates I was personal rep for. The rules are a pain in the butt, but the lawyer made sure we had all info for all recipients before any money was sent out. Accountant explained tax rules. Cost some money, but the estate was big enough to pay the cost. Had one cousin for an uncle who wantd to do it without help to save money. Told him that I didn't want to do that, but if he wanted to, and everyone agreed, I would gladly let him take over. We used the help.
Clip4
Touchdown! Greaser!
After watching 2 relative’s estates go over 10 years to settle with the court appointed executor walking off with most the money in fees, you should be glad to pay the govt their due and move one as quickly as possible.
NoHeat
Final Approach
How are they a scam?
On the contrary, I've read that Roth IRAs are excellent for estate planning -- among all your retirement assets, Roths are the ones you want to spend last, and pass them to your estate. A Roth IRA is an excellent inheritance to receive because taxes were already paid on it.
The only way that a Roth is double taxed, I've read, is essentially the same as for any inherited IRA: first there's regular income tax, and second there's estate tax (if any). The regular income tax is either paid by the original investor (in the case of a Roth) or at the time of the inheritance (in the case of a regular IRA that was tax deducted by the original investor). Is this not so?
Clip4
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If a Roth is less than 5 years old it has different tax rules.
kontiki
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Kontiki
I posted this because I know pensions have dropped of the radar and baby boomers are passing with IRAs now. A lot of folks haven't got a clue yet. This was my PSA to help it become common knowledge.
Despite the fact that I wish I had more tax avoidance options now, the way things unfolded are not an issue for me. The executor was recovering from a brain aneurysm and is very lucky to still be alive. It was a stressful time for all of the family members living locally. As the family member 6 states away, I got off easy. In our family, the main concern was that the the person who passed got all the medical care and living assistance they needed to be comfortable up until it was time. That happened with no fighting.
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PaulS
Touchdown! Greaser!
If you name beneficiaries on the IRAs, they transfer outside of the estate.
MauleSkinner
Touchdown! Greaser!
It may be a fact of life, but the fact that the government is just getting fatter by the minute makes getting upset about paying taxes legitimate.
PaulS
Touchdown! Greaser!
Taxes have decreased, but I get your point. Elections have consequences.
denverpilot
Tied Down
Umm what I was meaning was that the person who funded the Roth originally already paid taxes on that money, and the scam is that government gets to tax it again (double taxation right there) if it’s inherited. There’s an adjustment for basis, so it’s supposed to be on growth only, but ... the reality is, the offer was to withdraw it tax free to the original owner, and government doesn’t keep that deal if the original taxpayer dies. Remember, they’re funded with post-tax money to start with. The money and all the growth should come out tax free, but doesn’t.
NoHeat
Final Approach
You and I must be reading different things and coming to different conclusions.
Regarding taxation of inherited Roth IRAs:
From Schwab:
From Zacks.com:
Qualified distributions from an inherited Roth IRA come out completely tax-free. To take a qualified Roth IRA, distribution, the decedent must have had the Roth IRA for at least five years.
And since you mentioned "basis", I've read that's a concept applicable to traditional IRAs that include nondeductible contributions. From IRS Publication 590:Inherited IRA Withdrawal Rules
- Generally, you must take distributions during your lifetime or within five years after the original account holder passed away.
- With an Inherited Traditional IRA, you’ll pay taxes on any distributions you take.
- Rollover, SEP, and SIMPLE IRAs become Inherited Traditional IRAs.
- With an Inherited Roth IRA, you don’t pay taxes on distributions.
Qualified distributions from an inherited Roth IRA come out completely tax-free. To take a qualified Roth IRA, distribution, the decedent must have had the Roth IRA for at least five years.
If you inherit a traditional IRA from a person who had a basis in the IRA because of nondeductible contributions, that basis remains with the IRA.
I don't see how "basis" can be applicable to a Roth IRA, inherited or not.
The conclusion I see everywhere is that a Roth IRA is an excellent thing to inherit! No taxes on it, just required minimum distributions if you're not a spouse.
denverpilot
Tied Down
A warning is hidden in this. Name an executor who can get business done and has business sense. Many people name family and that’s not always the best option. Paying someone trusted (attorney, accountant, etc...) and willing who can do this job efficiently and effectively often is better than “uncle Bob” or whatever.
Kinda. Depends on the State and the asset must still be listed in Probate as to where it ended up, which can give creditors a trail to follow if the estate closes with outstanding debts.
And in some States the asset may still be forced to be used to pay creditors if the State doesn’t provide specific protections for inherited IRAs at the State level. SCOTUS ruled on this a while back and allowed it.
If an estate has significant debts and IRAs or real estate are involved, it’s highly advised to consult a Probate attorney in that State.
In some States, Probate may be “simplified” below certain dollar amounts and the simplification laws may or may not work in the advantage of the estate’s assets and where they ultimately end up.
Example, in Colorado one can sign a document that one is handling the estate of the deceased outside of Probate if the estate has little or no assets below a certain dollar amount and keep the entire Probate process from happening. This has repercussions for certain things however, like many businesses won’t deal with a representative of the deceased outside of Probate and an estate being formed, so anything without a named beneficiary may be “lost” to that business forever. It’s usually used for estates that are so far under water that there’s zero point in even starting Probate procedures.
Then there’s a second level where an estate can be handled by a “Personal Representative” who is the legal equivalent of an executor and there truly is an estate.
And then finally the traditional method where an estate is formed and there’s a named or court appointed executor.
But those lower levels are all very State specific. Again, a Probate attorney is recommended. But the lowest of those, the affidavit, is used when the person was so far underwater that there’s no point in establishing an estate at all, so don’t pay an attorney for that. Ha.
We’ve been seeing the inside of this meat grinder too much lately with family deaths well before people’s “time” so, I’m just sharing also, so people with unexpected family deaths aren’t surprised that they really might need an attorney who knows the State’s rules cold, to navigate the myriad of options allowed by law. Or in the case of someone who dies destitute, they need to look carefully at their State’s setup for “simplified” estates or even avoiding the creation of an estate altogether.
It’s interesting stuff, if we weren’t living through it. Closing down the bankrupt and failing businesses of a family member wasn’t particularly fun last year.
denverpilot
Tied Down
I guess I’d say “it depends”. But you may be correct on the Roth. My understanding of it was different based upon a professional’s advice, however it turned out the account in question wasn’t a Roth anyway, so we may not have circled back around to that properly. I think the devil in the details is in that phrase “qualified distributions” and you have to go look up what those are.
Since I’ll be dead, what happens to my estate is of small interest to me
.
(Actually, I’ve named the beneficiaries for my retirement accounts and discussed/listed the options for the beneficiaries use or non use as they see fit)
Cheers
.(Actually, I’ve named the beneficiaries for my retirement accounts and discussed/listed the options for the beneficiaries use or non use as they see fit)
Cheers
PaulS
Touchdown! Greaser!
So I guess it's different in every state, but my mom's ira listed my brother (the eldest) as her beneficiary so the money went to him outside the estate. We had to publish a notice of death or what ever it is called giving notice that any creditors had a year to file a claim against the estate, after that they are SOL. I did three, my mom, and her two brothers, who were bachelors and had no family of their own. My mom and one uncle had a will, which made everything relatively easy, the other uncle, whom I ended up being guardian for a couple years before he died, didn't want to even talk about dying or a will. Fortunately, the lawyer my uncle with the will used, ended up knowing me pretty well and the probate judge allowed us to use the same terms for the no will uncle that the one with a will had specified. So that made my life much easier.
bflynn
Final Approach
The IRS does not consider inherited money to be income and income tax is not due on it.
Tax may be due if what is being inherited is not money. I think typically (mandated?), the estate would pay capital gains to increase the basis of the property to the value at the time of death. In this case, the cost basis is now the current value and is inherited without additional tax due. For example, if your parents purchased a house in 1968 and passed away this year, there is a difference between the price they paid 50 years ago and how much it is worth today. The estate owes capital gains tax on that difference, but the beneficiary getting the house would owe nothing additional. The new owner would take the current home value as their new cost basis.
Checkout_my_Six
Touchdown! Greaser!
so...there is gain from the sale of a primary residence?
denverpilot
Tied Down
You’re catching on.
However there’s another way to deal with real estate by placing people on the title before someone is gone. Has ups and downs.
There’s other ways to do this in trusts as well.
And of course if the inheritor already has a home, one or the other is now “primary” and the other is “secondary” for purposes of their personal taxes maybe even before the other person’s death.
YMMV depending on how you do it.
Most of these things are “First World Problems” for sure, but if someone is expecting to leave a significant amount of assets to heirs or property, meeting with an estate planner well before death and going over options as to HOW to leave it can make a big difference.
Leaving a mess to sort out without any way to pay a pro to deal with it, is a multi-year nightmare for some families. A written plan for where everything goes AND how it’s all dealt with, and a legal Will is always better, unless you’re the type who says, “I’ll be dead. Not my problem anymore. I won’t care.”
PaulS
Touchdown! Greaser!
Income tax owed by the deceased needs to be paid, plus any income generated by the estate, if it's enough to pay tax on, needs to be paid.
PaulS
Touchdown! Greaser!
You’re catching on.
However there’s another way to deal with real estate by placing people on the title before someone is gone. Has ups and downs.
There’s other ways to do this in trusts as well.
And of course if the inheritor already has a home, one or the other is now “primary” and the other is “secondary” for purposes of their personal taxes maybe even before the other person’s death.
YMMV depending on how you do it.
Most of these things are “First World Problems” for sure, but if someone is expecting to leave a significant amount of assets to heirs or property, meeting with an estate planner well before death and going over options as to HOW to leave it can make a big difference.
Leaving a mess to sort out without any way to pay a pro to deal with it, is a multi-year nightmare for some families. A written plan for where everything goes AND how it’s all dealt with, and a legal Will is always better, unless you’re the type who says, “I’ll be dead. Not my problem anymore. I won’t care.”
Years ago, I worked with a widow, whose husband died without a will, so the house went to her and her two young at the time children. Well the children knew they owned the house too, out voted her, and sold the house from under her so they could buy new cars.
bflynn
Final Approach
Yes, but that is not inheritance. That is the deceased paying taxes, proving that between the two, taxes is still more certain than death.
PaulS
Touchdown! Greaser!
Actually no, once the deceased dies they can't pay taxes, you need to apply for a tax payer number for their estate and the estate pays what the deceased owed and what the estate owes, if anything. Unless you distribute the money in the same year you close out the estate, then the feds require the tax burden of the estate to be passed to the beneficiaries.
wilkersk
Pattern Altitude
Feeling upset about paying taxes on inherited money? How about paying taxes on the home you broke your butt to keep when the real estate bubble burst, but you needed to move anyway. We scacrificed quite a bit to come up with the down on the new house. Then, did the leg work to manage the old house as a rental. Now that values are up, taxes owed on the gain of the sale of the old house are huge. Feels like I'm getting robbed - TWICE!