Tax and Money Tip of the Week:
Saving Taxes on IRA Inherited from
Your Spouse | August 14, 2013 | No. 149
How is my spouse’s IRA taxed when he dies and I am the sole beneficiary of his IRA? How does his death impact our Required Minimum Distributions?
IRA’s can be subject to 2 different taxes upon the owner’s death. The IRA is part of the estate and is subject to estate tax AND you, as the beneficiary, must pay income tax when you take any distributions from the IRA. A little planning can help to reduce or postpone these taxes.
Income taxes – Income tax must be paid when you take distributions from your spouse’s inherited IRA, including the Required Minimum Distributions (RMDs).
When an IRA is inherited from someone who has already begun taking RMDs, generally the RMD’s continue, however, they are now calculated on the life expectancy of the beneficiary.
As the spouse (and sole beneficiary), you get some additional benefits that may minimize the RMD and help save/postpone taxes. You can redesignate your spouse’s IRA as your own, or you can simply roll over the IRA into your own IRA or other retirement plan. By doing one of these actions, you could postpone RMDs until you reach age 70 ½.
Additionally, you could choose to name a new beneficiary, such as your child, which would decrease the amount of the RMD calculation as well.
Estate taxes – Every individual’s estate is exempt from tax on up to $5.25 million. Additionally, this exemption is “portable” between spouses, which means that if your spouse does not use his/her entire exemption, the remaining amount can by used by your estate. The estate tax rules also allow an unlimited marital deduction, which means that estate tax is only paid after both spouses have died.
It is very important that you always have primary and contingent beneficiaries named on all of your IRAs or qualified retirement plan accounts for any non-spouse beneficiary to be able to set up an inherited IRA. This is a complex tax area. Call us to help you save taxes when you inherit an IRA.
Questions or Comments?
Mark Vitek, CPA/PFS, CFP®
…until next week.