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 general, inherited Roth IRA accounts are subject to the same RMD requirements as inherited traditional IRA accounts. Withdrawals of contributions from an inherited
Roth are tax-free.
Most withdrawals of income from an inherited Roth IRA account are also tax-free. However, profit withdrawals may be subject to income tax if the Roth account is less than 5 years old at the time the payout is made. 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. Distributions from another Roth IRA cannot replace these distributions unless the other Roth IRA was inherited by the
same deceased person.
If you inherit a Roth IRA as a spouse, you have several options, including opening an inherited IRA. Any type of IRA can be converted to an inherited IRA, including traditional IRAs and Roth IRAs, SEP IRAs, and Simple IRAs. 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.
It is important that the income tax treatment of the IRA remains the same from the original account to the inherited IRA. These rules don’t apply if you’ve simply transferred another IRA to your own IRA; they only apply to inherited IRAs. If the executor converted the IRA directly into inherited IRAs for each of the beneficiary children, the beneficiaries would be responsible for paying the taxes.
