Taxes on tIRA after death?

[albireo13]

I was just thinking …
I have my nest egg currently in tIRA funds. I am 68 yo and retired. DW is 4 yrs younger and same with her savings. If we both suddenly pass away in a car crash how does the estate manage the tIRAs?
We have 5 children and our will has our assets to be divided equally among them.

Do the proceeds pass on as tIRAs? Do the tIRAs get liquidated and the funds divided up? If so, how does the taxes on that work?

Just curious …

 

[Andre1969]

Things may have changed since then, but I inherited an IRA from my Grandmom back in 2015, and Dad in 2017. At the time I had the choice to cash them out, or roll the proceeds into inherited IRAs to defer the taxes a bit longer.

Back when I inherited them, they did the RMDs based on my own life expectancy, where they would rise slowly in the early years, but then really ramp up towards the end, to the point that ultimately, no matter how well invested they were, they would be depleted to zero when I turned 84. I was 45 when I inherited Grandmom's IRA, and 57 for Dad's.

Since the SECURE act thing passed in 2019, they limit that distribution period to 10 years, rather than the life expectancy of the beneficiary. I think there are some exclusions though, such as under-age children and such.

But basically yeah, your tIRA would be liquidated, the funds divided up, and taxes would just depend on what your kids did with it. If they didn't put it into an inherited IRA, they would pay income tax on the amount they inherited. If an inherited IRA, they would only pay taxes on the RMDs.

 

[Morgan22]

You should add the kids to you IRA's as beneficiaries so they do not have to go through probate. You can also add per stirpes so it's inherited down to their children, if they have any, if one of your children predecease you.

The beneficiary designation ensures that your children will get access to the funds fairly quickly.
What Andre1969 says is correct about the secure act. Basically they will roll the funds into an inherited IRA and have 10 years to liquidate.

If your children prefer a different brokerage, they can move the inherited IRA over to it also. But the inherited IRA is always set up at the original brokerage that you hold it at DOD.

 

[albireo13]

Ok. Thanks

 

[OldShooter]

Our plan has two grands and DS each getting trusts funded with tIRAs. To avoid paying the high trust income tax rates all tIRA withdrawals must be distributed to the trust beneficiaries in the tax year they are received by the trust. This effectively means that the money will distributed within ten years and the trusts will be closed.

One grand is getting a special needs trust where we don't want to have the ten year limit, so that trust is funded from a Roth.

 

[SecondCor521]

One grand is getting a special needs trust where we don't want to have the ten year limit, so that trust is funded from a Roth.

I think you're probably aware already, but inherited Roth IRAs also generally have the ten year time limit rule in the SECURE Act. They just don't have an RMD requirement during those ten years as traditional IRAs are about to.

The Roth could always be distributed into a trust, of course, and maybe that's what you're doing.

 

[OldShooter]

... The Roth could always be distributed into a trust, of course, and maybe that's what you're doing.

That's exactly what we are doing. After 10 years the Roth assets will simply be assets of the special needs trust. To the extent they are not distributed, trust income tax rates will apply to anything the assets earn but that is much less painful than paying on tIRA assets held past the ten year point.

 

[GrayHare]

Upon your death, non-spouse, non-trust beneficiaries wind up with an inherited IRA that they must deplete within 10 years. So, your IRA is not liquidated immediately unless the beneficiary chooses that. Amounts they withdraw from a traditional IRA will be subject to tax as ordinary income.

 

[Koolau]

Upon your death, non-spouse, non-trust beneficiaries wind up with an inherited IRA that they must deplete within 10 years. So, your IRA is not liquidated immediately unless the beneficiary chooses that. Amounts they withdraw from a traditional IRA will be subject to tax as ordinary income.

I think most people try to transfer on death with a beneficiary designation (in your case with a secondary beneficiary beyond your spouse) within the tIRA. That simplifies things.

 

[Sunset]

Upon your death, non-spouse, non-trust beneficiaries wind up with an inherited IRA that they must deplete within 10 years. So, your IRA is not liquidated immediately unless the beneficiary chooses that. Amounts they withdraw from a traditional IRA will be subject to tax as ordinary income.

+1
Nicely explained

 

[pb4uski]

Upon your death, non-spouse, non-trust beneficiaries wind up with an inherited IRA that they must deplete within 10 years. So, your IRA is not liquidated immediately unless the beneficiary chooses that. Amounts they withdraw from a traditional IRA will be subject to tax as ordinary income.

Correct in the OP's case since the OP isn't subject to RMDs yet. But if the decedent was subject to RMDs then non-spouse beneficiaries are subject to RMDs and must deplete the account within 10 years.

That was my situation when my mom passed. Since the tIRA wasn't huge and I was concerned that I might miss or under calculate an RMD, I just did a 100% withdrawal. It will slightly reduce the amount that I can Roth convert in 2024, but that's ok.