Inherited Ira Distributions

Individual Retirement account that any person inherits from a deceased individual is known as inherited IRA account. Treatment of distributions from Inherited IRAs for tax purposes is based on factors such as the type of IRA, relationship of the person inheriting the IRA with the person who is deceased, age of the beneficiary and the age of the deceased.

IRAs are used for retirement planning in the United States. There are tax advantages associated with them. Savings in IRAs rank on par with other types of retirement savings. These may therefore be excluded from being attached to the debtor's estate in bankruptcy filing.

If the deceased IRA account holder was old enough to be receiving RMD or the required minimum distribution, the person inheriting the IRA does not have much choice, but to receive these distributions. However, the beneficiary may provide a new timeline for such distribution. Of course, this timeline should be based on the beneficiary's life expectancy. There are life expectancy tables that are used for this purpose. Any IRA account holder is required to withdraw a minimum amount from the year he or she attains 70 years and six months of age.

The person who inherits an IRA does have a five-year period available for withdrawing the monies in this account of the diseased. Any distribution received under inherited IRA RMD is added to the beneficiary's taxable income under the head other income.

The beneficiary may, however, withdraw more than the RMD. There are no penalties for such excessive withdrawals. Any such withdrawal, however, is taxable. The spouse of a deceased can opt to club the inherited IRA with their IRA accounts, provided such IRA account is not a new account. There are no penalties levied for such roll over. Beneficiaries falling in other class do not enjoy such benefits. They have to use single life expectancy table (Table 1) for identifying the amount of distribution.

Distributions on inherited Roth IRA accounts are treated differently from those on other inherited IRAs. Beneficiary inheriting Roth IRA is not exempt from paying estate tax. However, there are provisions under income tax that enable the beneficiary to withdraw amounts from inherited Roth IRA account without being liable for tax or penalties. For example, withdrawals of rollover contributions in the inherited Roth IRA are exempt from both tax and penalties, whereas earnings contributions in this account are taxable. However, it would be advantageous for the beneficiaries to withdraw later.