The executor of a person’s estate must take on the important responsibility of ensuring that the deceased person's last wishes are carried out, concerning the disposition of their property and possessions. There are times when investments and savings are part of that estate.
An individual may have an a 401(k) plan or IRA that designates the beneficiary or her estate as her heir. If a beneficiary, other than the decedent's estate is named, then the beneficiary collects the asset directly from the plan administrator. If the estate is the beneficiary or if there is no beneficiary, then a probate may be necessary if the value of the assets exceed $150,000 in California and the Executor collects the asset.
Inherited IRAs are not like other assets. Executors must be aware of what to do when withdrawing the IRA into the estate account, particularly about how will these funds will be taxed. nj.com’s recent article asks “Who pays taxes on this inherited IRA?” It explains that the distributions from an IRA are treated as ordinary income by the federal tax code.
If the decedent had a will, the will must be probated, and it may stipulate that the money from the IRA is to be given to the deceased’s children. These distributions to the children are taxed at their marginal tax rates. However, it is important to note that when an estate is an IRA beneficiary, the entire account must be withdrawn within five years.
If the executor moves the IRA directly into inherited IRAs for each of the beneficiary children, the beneficiaries would be responsible for paying the income taxes associated with withdrawing the funds from the IRA.
If the executor withdraws the IRA assets, then the executor would pay the taxes from the estate assets. However, if the assets of the probate are distributed to the beneficiaries in the same tax year, the income is passed on to the beneficiaries to be reported on their personal income tax returns.
You will need to speak with the custodian of the IRA to find out what is and is not permitted in terms of distribution: are they allowed to roll the IRA into a beneficiary IRA, or can they divide the account into separate IRAs for the beneficiaries? The distribution must take place within five years, so keep that in mind when discussing options and goals for the IRA and the heirs. An estate planning attorney will be able to determine your best tax options for the inherited IRA when settling the estate.
One of the main goals of our law practice is to help families like yours plan for the safe, successful transfer of wealth to the next generation. Call our office today to schedule a time for us to sit down and talk about your estate plan, where we can identify the best strategies for you and your family to ensure your legacy of love and financial security. Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim.
Reference: nj.com (January 7, 2019) “Who pays taxes on this inherited IRA?”