As more people inherit IRAs, the chances for serious snafus may surge. Pay attention, because mistakes here can get very expensive, very fast.
When you are the executor of an estate, you are responsible for making sure that the decedent’s wishes are carried out, and that includes investments and savings accounts. Some of those assets can be complicated, like inherited IRAs.
An individual may have an IRA that designates the beneficiary or her estate as her heir. Inherited IRAs are not like other assets. Executors must be aware of what to do when withdrawing the IRA into the estate account, particularly about how these funds will be taxed.
nj.com’s recent article asks “Who pays taxes on this inherited IRA?” It explains that the distributions from an IRA are treated as ordinary income by the federal tax code.
The will must be probated, and it may stipulate that the money from the IRA is to be given to the deceased’s children.
These distributions to the children are taxed at their marginal tax rates. However, it important to note that when an estate is an IRA beneficiary, the entire account must be withdrawn within five years.
If the executor moves the IRA directly into inherited IRAs for each of the beneficiary children, the beneficiaries would be responsible for paying the taxes.
If the executor withdraws the IRA assets, then the executor would pay the taxes from the estate assets.
Start by having a conversation with the custodian of the IRA to learn its rules for distribution of an inherited IRA. Remember that the distribution must take place within five years, so you do have time to make sure this rollover is done correctly.
Speak with an estate planning attorney who understands the strict rules governing IRAs and inheriting IRAs. They will also be able to help you determine what options might be best for the heirs, like dividing the account into separate beneficiary IRAs. This is a complex investment tool, so you’ll need help from knowledgeable professionals.
Reference: nj.com (January 7, 2019) “Who pays taxes on this inherited IRA?”