Inherited Spousal IRA

[Cat in OH]

Facts as I know them: Wife, surviving spouse, is age 58. Husband died last month at age 77. Prior to his death, he had just about emptied all their/his accounts. His IRA has about $20,000 in it and she'll need that to live off of now so she can't roll it into an IRA for herself.

I've never handled an inherited traditional IRA and I'm confused as to the tax implications. The Total Tax Guide says that "IRAs can be inherited from their owner and generally are included in the owner's gross estate for estate tax purposes." Does that mean that 1) the IRA is subject to estate tax and not taxed as income to the wife? and 2) her basis in the IRA is the amount included in the estate (meaning she would only pay tax on any earnings after his death as she withdraws)? The Tax Guide goes on to talk about taking minimum distributions. If she does take them, I'm assuming she isn't subject to any penalty for withdrawals before she's 59 1/2 as long as she doesn't elect to treat the IRA as her own.

And before you all start worrying about my doing her returns, etc on this, I'm not going to. She's a friend and in way over her head. I just want to be a sounding board and help her ask her accountant the right questions.

Thanks and Happy Fourth!!

Cathy

[kcjenkins]

She can roll it over, but if she needs to use the money now, she can take it out as periodic payments, and that way it will only be taxable as she takes it out. She should discuss this with the trustee, bank, investment adviser, etc.

[Cat in OH]

How much of it is taxable as she takes it out? All or just earnings after his death or after the estate is settled? Any idea?

Thanks.

[joanmcq]

All of it unless he had basis in the IRA. There is no DOD step up in basis on an inherited IRA (I wish! I've got one myself)

[Pacun]

She should wait until she is 59.5 years old so she doesn't pay penalty. Remember that she would have a basis is the decedent had a basis on the IRA.

[TAXBILLY]

There is never a penalty from an inherited IRA.

taxbilly

[OldJack]

And... the IRA is an asset of the estate for purposes of determining if the estate has an estate tax (form 706 Sch-I) on assets valued at over the $2 million. However, it is not a part of the estate for estate income tax (form 1041) or distribution since she inherited it direct as a beneficiary. In other words its her money immediately upon death and basically it is 100% taxable only when she takes the money out of the account. When she takes or has to take the money out is what the regulations and requirements are all about. No big deal.

[TAXBILLY]

And ... since he was already drawing his RMD she must continue at least that.

taxbilly

[Pacun]

I think the new regulation states that you can readjust to reflect the life expectancy of the new ower. I am not sure if you can or you must adjust.

[joanmcq]

You adjust the RMD to the life expectancy of the beneficiary using the single-life table.