CPA Mons & CPA Dads Information Center concerning Inherited IRAs

 


Recorvery Rebate Credit
Mileage Deductions
Car Donation Deductions
Bad Debt Right Off
Hybrid Cars Deductions
Tax Cash Today at Western Union
CPA Moms - Services Offered
Tax Preparation
Electronic Filing
FREE IRS Forms
Enrolled Agents
Tax Moms
Recovery Rebate Credit
CPA Moms
Representation before IRS
Non Profit Tax Services
Accounting
Bookkeeping
CPA Loan Letter
$7500 Downpayment for your Home
Inherit IRA Home Page
Inherited IRA News
Inherited IRA Articles
Additional Resources
Want to Join the MoMs?
Questions for CPA Moms?

 


%SPJONSOR1%




 

 


 


The tax ramifications of an inherited Roth IRA
>/H1>

"Be sure to read the fine print."

It's neither complex, nor profound advice. Yet, it isn't easy advice to follow when you are navigating your way through pages of IRS rules and regulations governing the way you manage your retirement savings plans. It's clear the IRS has not yet discovered the beauty of simplicity.

This is the case with the rules and regulations surrounding the Roth IRA. Although the average investor hasn't memorized IRS Publication 590, Individual Retirement Arrangements (IRAs), there are a few key rules you need to know about your Roth IRA that can help you avoid making some mistakes that could cost you or your beneficiaries down the road.

What is a Roth IRA?

Unlike a traditional IRA, the Roth IRA offers no deduction for contributions (which are made with after-tax money). All of the tax benefits associated with a Roth IRA happen when withdrawals are made. Subject to certain rules and qualifications, withdrawals are not taxed at all. Once you put your money in, you never pay taxes on that money again if you make qualified withdrawals.

An estate planning tool

Because there is no required minimum distribution for the owner of a Roth IRA, it is possible to use the Roth IRA as an estate planning tool and pass on significant funds to your heirs. While your beneficiaries may have to pay estate taxes on the value of the Roth IRA, no part of the Roth IRA will be subject to income tax to your beneficiaries. Because Roth IRA earnings are not subject to income tax (to you or your heirs), much of the tax burden is eliminated.

But here’s the caveat: The biggest problem with Roth IRAs is that beneficiaries may be required to take distributions. Although the Roth IRA is not subject to required minimum distribution rules for the account owner, it is important to point out that required minimum distribution rules apply for non-spouse beneficiaries. In fact, if the beneficiary of a Roth IRA waits too long before deciding how to handle the funds, he or she could wind up with a big tax bill down the road.

Spousal beneficiary

If a spouse is listed as the beneficiary of a Roth IRA, upon the owner’s death, he or she keeps the Roth IRA intact or elects to roll the Roth IRA over to his or her own Roth IRA. In either case, the spouse would not be required to take any distributions during his or her lifetime and would be allowed to designate new beneficiaries.

Non-spousal beneficiary

One who is not the spouse of the Roth IRA owner is subject to different rules. A non-spousal beneficiary must take full distribution either by the end of the year marking the fifth anniversary of the account holder’s death or over the life expectancy of the beneficiary -- starting no later than Dec. 31 of the year following the year the account holder died.

If distributions to the beneficiary do not start by Dec. 31 of the year following the year of the owner’s death, the rule requiring a complete distribution of the plan balance within five years will become effective -- so it’s important to plan accordingly. All qualified distributions would be tax-free. Failure to take the distribution results in a 50 percent penalty of what should have been distributed.

Imagine paying a 50 percent tax when it could have been completely tax-free.


John Larson, ChFC, is a financial advisor at American Express Financial Advisors, Inc. in Merrillville. His column solely represents the opinion of the writer and not necessarily that of The Times. Readers can reach him at (219) 736-8677.


  • Spanish Inheritance Tax - The Basics
    Inheritance tax is a huge concern for anybody who owns property in Spain. It is a vast subject but I will attempt to clarify for you the basics. For more in-depth information, you will need to do further...
  • Why Do I Need A Tax Attorney?
    It is unfortunate but true, that many people do not even consider consulting a tax attorney until they open their mailboxes one day and there is that dreaded letter from the IRS. A tax attorney is a lawyer...
  • Top Tax Jobs Online
    At any single point in time, there are thousands of tax jobs posted all over the internetTax-Jobs-Online.com is powerful gateway to help job seekers find great tax jobs on the internet. If you are looking...
  • Inheritance Tax, A Concise Guide
    With ever-increasing property prices, more and more people's assets are now worth more than the inheritance tax threshold of £285,000, which has never been increased in proportion to the recent property...
  • Working or contracting abroad
    Are you heading overseas to find your dream job, or have you been offered an opportunity to work in another country; if so, there are some tax matters to organize and resolve when you take on overseas...
  • An Estate Planning Primer
    An estate is the total value of everything we own--and business and personal assets can add up quickly. Everyone has an estate. And realize it or not, everyone also has an estate plan. An estate plan can...

Before you learn about stretching your Inherited IRA, you need to understand IRA basics.  IRAs have been around for years.


Traditional IRAs allow you to invest a certain amount of before-tax earnings on a yearly basis. That reduces your current taxes because you don’t pay taxes on that money until you actually take it out later. The main benefit of your IRA is that it grows more quickly because you aren’t taking money out to pay taxes.


Company retirement programs like 401(k)’s work similarly. Sometimes companies will match a portion of their employees’ contributions, dramatically increasing the employee’s return. If your company matches any of your contribution make sure you take advantage of it!  When you change jobs or retire you can transfer the money from your 401(k) into your own IRA.


Roth IRAs allow you to invest after-tax dollars, but the earnings on a Roth IRA are never taxed.  You aren’t required to start taking money out of a Roth IRA at age 70 ½ like as in a traditional IRA.