Taxation of IRAs at Death
September 3, 2018
TAXATION OF IRAs AT DEATH
I have been receiving more questions lately regarding taxation of IRAs at death. So, to address this tax topic, I would like to give you some basic concepts.
Regarding control over the IRAs for most of us, the beneficiary forms or a default provision of the contract with the custodian or trustee where the assets are invested, control the disposition of an IRA and a qualified plan.
Other planning techniques for IRAs are wills, which the executor controls the assets of an estate, and with trusts, is where the trustee controls the assets in a trust.
Distribution of an IRA after death is controlled by the beneficiary form, as opposed to a will. State property law is preempted by ERISA or REA. REA is a waiver where spousal permission is required for the employee spouse to name a NON-spousal beneficiary. Income taxes on distributions from an IRA or qualified plan will vary substantially depending on how the beneficiary form is prepared.
Get Jeff Travis | Northbrook, IL | JeffTravis.net’s stories in your inbox
Join Medium for free to get updates from this writer.
The objective of IRA or qualified plan (401k, profit sharing or pension plan) distribution is to minimize income tax and maximize deferral.
Required minimum distributions(RMDs) generally must occur April 1 of the year following the year the IRA or qualified plan owner turns age
70 ½. Once distributions occur, they must continue every year by December 31st.
The formula for RMDs is: RMD = Aggregate IRA/qualified plans prior year 12/31 FMV (Fair Market Value) account balances DIVIDED BY Life Expectancy factor (an IRS table factor).
The tax strategy for some people is to prolong IRA payments over the longest possible period of time, thus increasing the wealth to future generations. This is called an inherited or stretch out IRA. An IRA is treated as “inherited” if the individual for whose benefit the IRA is maintained has acquired the IRA because of death of the original owner. Under tax law, the IRA assets can be distributed based upon the life expectancy of the beneficiary.
Inherited IRA provisions allow the beneficiary’s life expectancy to be used for distributions after death of an IRA owner.
Another popular distribution of IRA assets after death is to a charity. The way to achieve the best end result is to have a transfer of the IRA asset amount directly to a 501(c)3 tax exempt organization. You must name the charity as the designated beneficiary of the IRA asset.
There are more details regarding this tax topic. This article is just general tax information. Please contact your CPA or financial planner for additional guidance.
