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IRA death benefit - tax implications

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  • IRA death benefit - tax implications

    I'm expecting to receive a death benefit from my father's IRA in the coming weeks. I believe it will total in the neighborhood of $17-18k. Does anyone know how it works when it comes to paying taxes on this amount?

  • #2
    AJ if you cash it out, then the amount will be added to your ordinary income and you'll pay taxes at whatever bracket that puts you in.

    If your father was taking RMD, then I believe you can also take RMD, but I forget how all that works, if it's on his age or your age?

    I had a small IRA I inherited from my mom and I didn't want to fiddle faddle around with the RMD every year so I cashed it out and paid the taxes on it. But we're talking 2k, so not substantial.


    • #3
      He was taking RMD. My plan, at the moment, is to put the amount of the death benefit toward my own retirement fund - opening a new IRA or investment account with it. But I don't know how much, if any, of that contribution could be written off against the taxes I'd owe upon receiving the death benefit in the first place.


      • #4
        This article from Fidelity explains Non Spouse beneficiary IRA rules. There is no 'write-off', the taxes will be owed on that money one way or the other. Obviously, once that money is in your hands, and taxes paid you can do whatever you want with the money, but it cannot be rolled over into your own retirement accounts tax free.
        My other blog is Your Organized Friend.


        • #5
          Originally posted by AJSimon View Post
          I'm expecting to receive a death benefit from my father's IRA in the coming weeks. I believe it will total in the neighborhood of $17-18k. Does anyone know how it works when it comes to paying taxes on this amount?

          With an Inherited IRA, you need to take annual distributions no matter what age you are when you open the account. This doesnít apply if you've simply transferred another IRA to your own IRA.
          • Generally, you must take distributions during your lifetime or within five years after the original account holder passed away.
          • With an Inherited Traditional IRA, youíll pay taxes on any distributions you take.
          • Rollover, SEP, and SIMPLE IRAs become Inherited Traditional IRAs.
          • With an Inherited Roth IRA, you donít pay taxes on distributions.
          • To evaluate the potential impact an inheritance might have on your overall tax situations, we recommend you also consult your tax advisor.


          • #6
            I have an inherited IRA. If your father was already taking distributions, you also must take a yearly distribution based on your age--there's a chart on the IRS web site. If he wasn't taking a distribution yet, then you can just let it sit until you retire.

            If it's a regular IRA, everything is taxable as regular income whether you take it lump sum or as a yearly distribution. I have mine with T. R. Price and when they send me my yearly check they also deduct for Federal and state taxes, so I have no unexpected tax burden.

            For that amount (my opinion) I'd put it in a stable mutual fund. I did that with mine, and after 19 years and taking a yearly distribution I still have more in the account than when I started.


            • #7
              I have a smallish, inherited traditional IRA. I considered cashing it out to just not have to drag it around for the coming years. Assuming it is a traditional IRA, about the only way (I know of) that you can offset the tax issue is to make tax deductible contributions equivalent to what you pull out. A robbing Peter to pay Paul situation where you essentially decrease your income through contributions and then increase it with IRA withdrawals. Unless you have an existing workplace retirement savings, and aren't contributing at all to it, you probably can't do that full amount in one given year. You could potentially draw it out over the course of 3 or 4 years, putting the same value of money into your personal traditional IRA and then taking the tax break from that. I hope that makes sense.

              I moved my inherited IRA to a company where I already had other accounts, so it's just another listed account where I already do business. You can set it up to do an automatic withdrawal each year too, so it can sit, grow, and give you a nice little gift each year. That's what I do, think of the couple hundred dollars that distributes each year as a gift from my dad. That said though, I don't want to eventually burden my child with an excess number of inherited accounts, so once retirement comes, we will probably draw down the inherited account as we need the income and it makes sense from a tax standpoint.