Mistakes made with an inherited IRA can quickly become very expensive. A recent article in The Hampton Roads Business Journal, “You may be paying more tax on inherited IRA than required,” explains the basics.
During life and after death, IRAs are distributed differently than other assets. Your IRA beneficiaries may qualify for special tax breaks that are often overlooked. IRAs cannot change ownership during your life or be jointly owned, and generally pass by contract, not by a will.
IRAs may require their own estate plans, and those plans should be integrated within the overall estate plan. Speak with your estate planning attorney about tackling this.
As far as taxes are concerned, IRA investment gains may not be subject to the 3.8% investment income surtax and may be subject to double tax at death, both income tax and possibly estate tax.
For example, if you were to inherit an IRA from your father at his death and he has a taxable estate, as the beneficiary you may be entitled to a special deduction that can offset some of the otherwise-taxable distributions from that IRA. This deduction is easy to miss because of the two entities that must coordinate their tax planning: (1) the settling estate and (2) the IRA beneficiary. It is common for these two not to make a coordinated effort to realize all of the tax-saving opportunities.
The distributions from an inherited IRA are generally fully taxable to the beneficiary. You might be able to find shelter from that tax liability, which would be easier to catch before the inherited IRA begins to pay income. However, even if you’ve started to get income, you may still be entitled to take this deduction.
When an IRA owner dies, there are a few complex rules from the IRS that you’re expected to comply with. The 691(c) deduction for “Income in Respect of a Decedent” may be worth discussing with your estate planning attorney if you have inherited an IRA or think you may in the future. IRAs are very different when it comes to how they mesh with your existing plans and those of your heirs.
When it comes to retirement savings, IRAs are terrific, but their complexity requires the help of an experienced estate planning attorney. The goal is to pay less taxes, not more, and that takes understanding how the inherited IRA works, as well as how it fits into your overall estate plan.
Be prudent and make a plan with your estate attorney before an inherited IRA or your IRA can negatively affect you or your family.
For more information on IRA estate planning and other estate planning topics, visit our website and contact us today to schedule your consultation.
Reference: The Hampton Roads Business Journal (October 30, 2017) “You may be paying more tax on inherited IRA than required”