Hello,
The tax implications for an inherited IRA depend on the type of IRA and the timing of withdrawals:
- Roth IRA-----Withdrawals of contributions are tax-free, and most withdrawals of earnings are also tax-free if the account was opened at least five years before the owner's death. If the account is less than five years old, earnings withdrawals are taxable.
- Traditional IRA---Withdrawals are subject to ordinary income taxes.
- Estate taxes--If the estate was subject to the estate tax, the beneficiary may be eligible for an income-tax deduction for the estate taxes paid on the account.
- Required minimum distributions (RMDs)---If the original account holder was already taking RMDs, the beneficiary is usually required to take RMDs as well. However, if the original account holder hadn't started taking RMDs, the beneficiary isn't required to take a distribution every year.
- Distribution time--Beneficiaries typically have 10 years to empty the inherited IRA account. However, the time period can be extended so that the beneficiary can distribute the assets over their life expectancy.
- Early withdrawals--There are no penalties for early withdrawals, regardless of the beneficiary's age. However, withdrawing money faster could result in larger amounts being withdrawn, which could have a significant impact on the beneficiary's tax bill.
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