Tax Consequences of Inherited IRA

[Deleted]

We are doing some additional Estate Planning for my MIL (mother in law). DH is her only child. MIL will be 77 in a couple of days and has been taking the minimum distributions from her traditional IRA. MIL says she thinks she's going to die within the next year. Yes, a bit dramatic but she's had 4 or 5 primary cancers and given where she is both mentally and physically I will be surprised if she makes it much past 80.

DH is 53. What are the tax consequences to inheriting the IRA? Do I understand correctly that he has the choice of 1) taking it all in one lump sum and paying tax at he gross income (including the amount of the IRA) rate; 2) Taking it over 5 years (presumably at the gross tax rate including the distribution); or 3) Taking it over his amortized lifetime (again at the current gross income rate)?

As always, thanks for your help,

Bonnap

[mwcpa]

from the pub 590 noted by tough

"Inherited from someone other than spouse. If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. This means that you cannot make any contributions to the IRA. It also means you cannot roll over any amounts into or out of the inherited IRA. However, you can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary.

Like the original owner, you generally will not owe tax on the assets in the IRA until you receive distributions from it. You must begin receiving distributions from the IRA under the rules for distributions that apply to beneficiaries. "

How much other income does MIL have.... would it make sence to take "greater" than the RMD? Example.... have no income except 20K in SSA, RMD is 2K..... tax is zero...... now up that RMD to more than the RMD, say 10K.... tax is still zero.....

[Deleted]

MIL is in the fortunate position of having earned a very nice Federal pension which is probably in the $110k range. So ironically in spite of our greater NW, DH and I should be in a lower tax bracket than MIL starting in 2013. We expect our income to drop to about $70k which will be comprised of oil royalties, stock dividends, bond mutual fund and ordinary interest and me cashing in my 457 over a 5 to 6 year period. But with the write offs we get from our 4 rental properties I'm guessing we won't be paying much tax on that $70k of income.

I can certainly dial back on how much we take from the 457, but we're also inheriting her house which has a mortgage slightly higher than than the IRA balance ($270k vs $250k). In an ideal world I'd like the OPTION to be able to pay off that mortgage with the IRA but I think it's going to be too much of a hit tax-wise. I think we'll probably take enough of a distribution to cover the costs of maintaining the property plus the taxes; maybe about $3k/mth.

I'll review the link TT posted and see if there are some other options we should consider.

Thanks to both of you!

[Deleted]

Hmmm. Question: Can DH take a distribution in 2013 from the inherited IRA if he's only 54?

[Deleted]

Jan 5, 2012 11:11:23 GMT -5 @bonnap said:

Hmmm. Question: Can DH take a distribution in 2013 from the inherited IRA if he's only 54?

I am pretty sure that the IRS makes you take distributions from an inherited IRA, regardless of your age, because they want the tax revenue.

[mwcpa]

Archie, actually, it's Congress, not the IRS who wrote the basic rules on the subject....

when they give someone a tax break for something they need to make it back someplace else.....

[TheOtherMe]

Jan 6, 2012 6:33:25 GMT -5 mwcpa said:

Archie, actually, it's Congress, not the IRS who wrote the basic rules on the subject....

when they give someone a tax break for something they need to make it back someplace else.....

I was going to say this last night, but thought better of it. Everybody blames the IRS for tax laws, but Congress is the one who writes the laws. The IRS interprets them and enforces them. Totally different roles.

[mwcpa]

theotherme....
i feel it is important to set the record straight given the bad rap the IRS gets, in many cases unfairly, due to the acts of Congress (the IRS has bad eggs in it, as does every other organization in the world, and Congress has the most by percentage in my opinion).... and it always amazes me the ones who often complain about the IRS the most are the same group who writes the insane laws that they charge the IRS with administering and those who get caught cheating.... but that's politics, always blame the other guy for things you did.....

[Deleted]

Thanks guys!

[lynnerself]

I (and my sibs) inherited an IRA when my mother died. I was 50.
Each of us had the three options you stated, and we each could choose how we wanted it.
I chose to take mine over my lifetime.
It is in an IRA entitled "xxxxxxxxx deceased for the benefit of xxxxxx".
And I am required to taxable MRD based on my age each year.

[taxref]

And I am required to taxable MRD based on my age each year. "

Yes. Failure to timely make a RMD on lifetime distributions is considered to be an excess accumulation. It is subject to a 50% penalty, which is computed on Form 5329.