Inherited Ira Tax

Inherited IRA rules are different for Spouse and Non Spouse beneficiaries. However, the IRS tax rules are basically the same for both Spouse and Non Spouse with the only difference being between Traditional and Roth IRAs.

Traditional IRAs are funded by before tax contributions so they are funded before taxes are paid ensuring that taxes will be paid at the time of the distribution. Distributions are considered part of the gross income of the beneficiary. If the distributions of a Traditional IRA are not made in a timely fashion there could be a 50% tax rate applied to each year of the error.

Roth IRAs are funded by after tax contributions. Being funded after the taxes were paid means the distributions are tax free.

With both the Spouse and Non Spouse of an Inherited Traditional IRA, taxes will be due on any distribution. If the original owner had already reached the age of 70-1/2, then there is a Required Minimum Distribution (RMD) rate set by the IRS. There is no RMD required in an Inherited Roth IRA for those over 70-1/2.

The IRS has established a Single Life Expectancy table to determine how many distributions the Non Spouse beneficiary must take during their lifetime. If the Non Spouse beneficiary is relatively young, the distributions may be spread over many years, thereby lowering the tax liability. With each additional year of age, the amount of the distribution goes up and increases the tax liability. The Spouse does not have a certain number of distributions. They still must pay taxes on any distribution taken.

A wise beneficiary will seek the help of a Financial Planner. A Financial Planner can assure that the Non Spouse beneficiary will take the distributions as required by the IRS and don't have to pay the 50% tax rate on any distribution..