Taxation of Distributions From a Beneficiary IRA

by Mark Kennan

    You don't have to report inheriting an individual retirement account on your taxes, but you will have to report any distributions you take from the account. If you're the surviving spouse of the decedent, you have the option to treat the IRA as if it were your own. If you do so, the distributions are taxed as if you always owned the IRA rather than if you're taking the distributions as a beneficiary.

    No Penalties

    No matter how old you are, or how old the decedent was at death, you won't owe an early withdrawal penalty when you take distributions from your inherited IRA. All distributions taken by beneficiaries are automatically exempted from the 10 percent early withdrawal penalty.

    Inherited Traditional IRAs

    The entire distribution from your inherited traditional IRA is taxable unless the decedent made nondeductible contributions from the account. In the event the decedent did make nondeductible contributions, you must pro-rate your distributions based on the make-up of the account. For example, if the account contains $30,000 of nondeductible contributions and is worth $300,000 when you take your distribution, 10 percent of your distribution comes out tax-free.

    Inherited Roth IRAs

    When you inherit a Roth IRA, the taxes depend on how long the Roth IRA has been open. The age of the Roth IRA is counted from Jan. 1 of the year the decedent made the first contribution. If the Roth IRA is at least five years old, all your distributions come out tax-free. If not, you withdraw the contributions first, which come out tax-free, and then you pay taxes when you start taking out the earnings.

    Roths Containing Conversions

    If the Roth IRA you inherit contains conversions from tax-deferred accounts, you must count separate five-year periods for each conversion. If any conversion hasn’t satisfied the five-year rule, the earnings from that conversion are taxable when you withdraw them. For example, if the decedent had the Roth IRA open for many years, but had converted $5,000 to the Roth one year ago, any earnings on that $5,000 would be taxable.

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    About the Author

    Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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