IRA Beneficiary Tax Rules
Americans carry the right to pay the least amount of taxes possible---by legal means. Individual Retirement Arrangements (IRAs) that are passed onto beneficiaries as part of an estate do carry unique tax consequences that should be understood prior to making important legacy decisions.
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Identification
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Traditional IRAs allow Americans to build savings with pre-tax money on a tax-deferred basis. IRA savings are taxed at ordinary income levels upon distribution. As of 2009, distributions usually cannot be made before age 59 ½, without penalty. Required minimum distributions are enforced at age 70 ½.
Beneficiaries
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Surviving spouses and children are the typical beneficiaries for IRA accounts. The Internal Revenue Service (IRS) has established particular tax liability guidelines according to the status of the beneficiary and account distributions.
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Defer Tax Liability
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Surviving spouses defer paying taxes by re-naming the IRA as their own, or rolling over the money into another IRA or retirement plan---without making any withdrawals. All beneficiaries may defer taxes by transferring the IRA money into accounts that were previously set up by the deceased for their benefit.
Tax Consequences
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Withdrawals, or distributions made from the IRA for the beneficiary, are treated as taxable income. The IRS publishes orders to calculate cost basis and required minimum distributions within Publication 590.
Rollover warning
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Contact your current retirement plan administrator to execute the rollover on your behalf. You may trigger expensive penalties and taxes by holding on to a check made out to yourself from the financial institution of the deceased for longer than 60 days.
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References
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