Inherited IRA

[charlie32606]

Confused about inherited IRAs and Roths.  If this is part of an inheritance and you don't have to pay taxes for inheritances under $11 million, why do I have to report this as income and be taxed?

[TeriH]

Good question!

Two of the most popular Individual Retirement Account plans are the traditional IRA and the Roth IRA. The main difference between the two is when you get taxed.

• In a traditional IRA, you generally don't pay taxes on your contributions and earned interest until you make withdrawals. In other words, you're getting a tax deduction now and will pay the taxes later when this investment is withdrawn, according to the distribution age requirements.
• In a Roth IRA, you don't get to deduct your contributions. However, because Roth IRAs are funded with after-tax dollars (money that's already been taxed), you'll pay taxes on your contributions but won't pay taxes when you withdraw them in the future, if you meet the age distribution requirements.

To sum it up, you can either pay the tax now with a Roth IRA, or pay the tax in the future with a traditional IRA.

This is a great article written by TurboTax to explain this in more detail.  

The fact that you inherited an IRA or Roth is great.  But, the tax man has to be paid.  If it was traditional, it will be when you take it out.  But, if it was Roth, the taxes have already been paid.

[KimberW]

Your question is referring to multiple kinds of taxes -- and it is definitely a confusing area.

There is an exclusion from estate tax for $13.61 million per individual for 2024. But that is very different than income taxes. [Note: this exemption amount could be reduced dramatically after 2025 if certain tax laws are not renewed.] If someone dies with an estate of more than the exclusion amount, then there is a tax imposed on the estate -- not on the beneficiaries -- on the excess amount.

The estate tax affects almost nobody, currently. But, there are types of funds that you can inherit that are subject to income tax. Generally, if those funds would have been taxable to the person who died, then they will be taxable to the heirs as well.

This is why you have to pay income taxes on funds that you inherit from someone's traditional IRA. If they had lived to take withdrawals from that IRA, they would have had to pay income tax on the withdrawals. Likewise, so with the people who inherit the traditional IRA funds. Most beneficiaries have a time limit for withdrawing funds from an inherited traditional IRA. And, if the IRA's former owner was subject to Required Minimum Distributions, then the beneficiary will be as well.

Roth IRA accounts that are less than five years old ALSO have an income tax due on earnings (not contributions). So there may even be income taxes due on an inherited Roth IRA. Even if there are no taxes due because the Roth IRA is old enough, there is still a time limit for withdrawing all funds from the account for most beneficiaries.

There is a lot of information from the IRS that will help with what time frames and rules apply to different kinds of accounts and different types of beneficiaries: Retirement topics - Beneficiary