However,
death and traditional IRA distributions from an inherited traditional IRA are taxable. This is referred to as “income in relation to a deceased person.” This means that if the owner had paid taxes, the income is taxable for the beneficiary. An inherited IRA may be taxable, depending on the type
.
If you inherit a Roth IRA, you’re tax-exempt. With a traditional IRA, however, any amount you withdraw is subject to normal income tax. In other words, you must withdraw the inherited funds within 10 years and pay income taxes on the amounts distributed. Since withdrawals are required, don’t pay the 10% penalty if you’re under 59½ years of age
.
However, you must pay income taxes on the distributions and empty the account at some point. Taxes on an inherited IRA are due when the money is withdrawn from the account and taxed at your normal income tax rates. Taxes are generally only due on a traditional IRA, not on a Roth IRA (as long as the Roth IRA was open for at least five years). The original account holder of a Roth IRA is never required to accept RMDs, but those who inherit Roth IRAs do so unless they fall into one of the
exemption categories.
Any type of IRA can be converted to an inherited IRA, including traditional IRAs and Roth IRAs, SEP IRAs, and Simple IRAs. As a beneficiary who is not a spouse, you don’t have the option to transfer inherited IRA assets to your own IRA. As a beneficiary who is not a spouse, if you decide to transfer inherited IRA assets from the original owner’s IRA to an inherited IRA in your name, the assets won’t stay in your inherited IRA account forever. These rules don’t apply if you’ve simply transferred another IRA to your own IRA; they only apply to inherited IRAs
.
If the original IRA owner left a percentage of their IRA account to more than one beneficiary, it’s important that you divide up your portion of the deceased’s IRA in your name and then complete your first RMD by December 31 of the year after the original IRA owner dies. When you receive a check, the money is generally taxed as ordinary income and cannot be deposited into an inherited IRA that you may own with another company or back into the inherited IRA from which it was originally withdrawn. It is important that the income tax treatment of the IRA remains the same from the original account to the inherited IRA. If you’re the child, grandchild, sibling, distant family member, or even a close friend of an IRA owner who has named you as their beneficiary, it’s important that you and the owner of the IRA understand the rules that apply to IRA inheritances
.
An inherited IRA is an individual retirement account that is opened when you inherit a tax-advantaged retirement plan (including an IRA or a retirement plan such as 401 (k)) after the owner dies. If the IRA owner died with a large fortune on which federal inheritance taxes were paid, you, as the beneficiary, are entitled to a tax deduction for the portion of those taxes that is attributed to the IRA. If you inherit a Roth IRA as a spouse, you have several options, including opening an inherited IRA. A decision to reject IRA assets must be made within 9 months of the original IRA owner’s death and before you take possession of the assets
.
Since you’re taxed on IRA distributions, the timeline of exactly when you pay inherited IRA taxes depends on when you withdraw the money.
