If one dies with money still in an IRA, what are the tax consequences? Do the beneficiaries have options as to when to withdraw the money? Is it taxable as of the date of death?
- posted
15 years ago
If you die with $ still in your IRA
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- posted
15 years ago
As Phil stated, it depends. But for a start: One should have the IRA account state its beneficiaries, i.e. the IRA passes through its own docs, not the will of the deceased. If their is no beneficiary on the account, and the will is consulted, the ability to stretch payments is compromised.
The spouse of the deceased may treat the IRA as her own, and transfer it to her own IRA, commingling it, if she wishes.
Non-spousal beneficiaries are permitted to take distributions over their lifetime but must begin withdrawals the year after the owner dies. The first withdrawal is taken based on their life expectancy (per IRS table) and each year after, 1 is subtracted from that divisor. A bit different from the normal RMD rules. Ordinary income is due upon withdrawal, but there are no penalties for taking a distribution from a beneficiary IRA.
Beneficiary IRAs are not allowed to be converted to a Roth. Of course, the spousal IRA, if transferred to her name is not treated as a beneficiary IRA.
Joe
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- posted
15 years ago
The all-purpose answer to initially-posed tax questions applies: "it depends."
In this case it depends on the nature of the beneficiaries and their relationships to the decedent. See IRS Publication 590 for the basics and your estate planner for the nitty gritty of planning for your demise.
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- posted
15 years ago
1) Can the IRA be contributed directly into a trust at time of death, and then liquidated tax free inside the trust? Money from the trust would be taxed at the time it is distributed out of the trust of course. 2) If the IRA is a Roth, does the person inheriting that Roth IRA and withdrawing from it lose all of the tax-free distribution benefits of a Roth?
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- posted
15 years ago
An IRA inside a trust is a tricky proposition and should really be avoided. Not saying it can't be done, it's too easy to mess it up.
The Roth beneficiary gets to take withdrawals over her lifetime, tax free. In fact, under many situations, it's better for an older person to convert their IRAs to Roth for purposes of estate planning, especially if the beneficiaries have high incomes.
Joe
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- posted
15 years ago
To answer your specific question the trust has to pay tax on IRA distributions just like an individual or alternatively the income is passed out to the beneficiary, depending on the facts and circumstances.
-- Drew Edmundson, CPA Cary, NC
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- posted
15 years ago
My answer was brief regards the trust as I was looking for notes I had regarding that situation. Sorry.
First, when setting up the trust, it can't be "funded". This runs counter to what trust attorneys tend to do, normally, the trusts are funded, to start the clock on having assets outside the estate, for medicaid eligibility for example. I saw a story that someone was advised to put the IRA in a trust while alive, that 'broke' the IRA, and taxes were due. I am just offering a mistake the OP needs to avoid.
Second, if the trust has two beneficiaries, RMDs are based on the age of the older one, so in this case, two accounts may be indicated, funded from two separate IRA accounts.
OP didn't offer a reason for wanting the trust. If it's to restrict withdrawals beyond any RMD, that's fine, but there's little to gain, in my opinion beyond that. A trust adds an annual burden and removes flexibility. When a young person inherits an IRA they can withdraw larger amounts than RMD with an eye toward tax management. Similarly, an older person with variable income can use it as a smoothing factor. Of course the young one can just deplete the account at 21. That's not good, and calls for a trust.
Joe
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