on an inherited IRA
Recently an IRA account was left to me from a
deceased relative. Can I liquidate the account without penalty since
the account owner was 81 years old? Will I have to claim the income
on his or my tax return? Thank you. --
One of the only good things about death is it forgives a lot of
things for taxes. One thing it forgives is the 10-percent penalty
on early withdrawals from an individual retirement account.
I assume this deceased relative was not married to
you, because that changes the answer. 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 new IRA account 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. However, distributions, either in whole or in part, are income
to you. You must begin receiving distributions from the IRA under
the rules for distributions that apply to beneficiaries (as opposed
to the rules that apply to owners).
Since the owner-relative was required to take distributions
from the IRA, you need to determine if he or she took the required
minimum distribution in the year of death. If not, you'll have
to. You can continue to take IRA distributions over your life expectancy
(assuming you are younger than the deceased) or you can take it
all at once within five years of death. Life expectancy tables are
found in IRS
Publication 590, Individual Retirement Arrangements.
For example, let's say your uncle died in 2003. You
are the designated beneficiary of your uncle's traditional IRA.
You are 53 years old in 2004. You use Table I and see that your
life expectancy in 2004 is 31.4 years. If the IRA was worth $100,000
at the end of 2003, your required minimum distribution for 2004
is $3,185 ($100,000 divided by 31.4). If the value of the IRA at
the end of 2004 is again $100,000, your required minimum distribution
for 2005 would be $3,289 ($100,000 divided by 30.4). Instead of
taking yearly distributions, you could choose to take the entire
distribution in 2008 or earlier.
Since the rules relating to inherited individual retirement
accounts are complex and fraught with minutiae, you should consult
a professional tax adviser about the particulars of your inheritance,
especially if you plan to keep the funds in the IRA to avoid paying
taxes or you suspect the owner had basis in the IRA.