Generally speaking, only the distributions from an inherited traditional IRA are taxable, just as they are for non-inherited traditional IRAs. Distributions from an inherited Roth are not taxable unless the Roth was established within the past 5 years.
If you received a distribution from an inherited Traditional IRA, it is added to your income and taxed accordingly. You will be receiving a Form 1099-R indicating your distribution as a “death distribution” – code 4 in box 7 will be applied. When it comes to inherited IRAs and other retirement plans, the rules can get pretty complicated, but we're here to help. When you enter your inherited IRA or plan in TurboTax, we'll ask a series of questions to determine how much, if any, is taxable on this year's return.
Inherited 401(k) plans are (or eventually will be) taxable but the amount of tax depends on the 401(k) plan rules.
For example, many 401(k) plans require a lump-sum distribution upon the death of the account holder. The surviving spouse can roll the 401(k) into an IRA, but if the beneficiary is not a spouse, s/he might be forced to take a lump-sum payment and the tax bill that goes along with it.
You will be receiving form 1099-R and it needs to be reported as such; please be sure to enter the form information into Turbo Tax exactly as it appears and answer the follow up questions. NOTE: The tax treatment of an inherited IRA depends on whether it was inherited from a spouse or a non-spouse.
1. Federal Taxes
2. Wages and Income
3. Select Jump to Full list
4. Scroll down to Retirement Plans and Social Security
5. Select IRA, 401(k), Pension Plans (1099-R)
You will be asked additional questions about the decedent. For example, if the decedent made any nondeductible contributions. Why is this important? Well, nondeductible contributions are treated as return of investment and are not taxable; it may be beneficial for you to find out (often your plan administrator, broker or banker has this information or form 8606 from prior years' tax return should indicate that information ). You will also be asked if the original owner of the IRA passed away after he/she was 70 ½, did he/she take required Minimum Distribution (RMD) in the year of death. Again, your plan administrator should know and you should as well…if the RMD was not taken, a 50% penalty on not distributed amount may be applied.
