retirement

Leave beneficiary cash or an intact IRA?

Judy O'ConnorDear Tax Talk,
My brother is dying and has a small ($40,000) IRA, of which I am the beneficiary. He wants to know if it would be better to cash out the IRA now, while he is alive, and distribute the funds or wait and allow me to eventually inherit the money and pay taxes accordingly.

Should he leave beneficiary cash or an intact IRA? Other than this IRA, he has no estate.
-- Suzanne

Dear Suzanne,
I am sorry to hear this sad news about your brother. Regarding your question on the IRA, since I do not know you or your brother's personal tax information, I cannot give you a direct answer, but I can point you in the right direction. You and your brother are going to have to figure out how much he would pay in taxes if he cashes it in now and then compare that to the taxes that would be owed by you in the future.

If you do inherit the IRA, generally as a non-spouse beneficiary, you would be required to directly roll over the inherited account assets to an inherited IRA in your own name and then begin taking required minimum distributions, or RMDs, from the account beginning in the year after the year of death of your brother, who is the original owner. The distributions to you would be based on your age and the IRS Single Life Expectancy Table for calculating the RMD, found in IRS Publication 590. The distributions would then be added to your income on your tax return.

As you can see, Uncle Sam is going to tax the income to either your brother or you. So it is in your best interest to determine what you can do to minimize the amount.

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