Inherited IRA

[jeanmissor]

I inherited portion of a friend's IRA.  I was told to open a Inherited IRA, which I did.   I have now been informed that the attorney handling the estate liquidated the IRA account and is sending me a check and preparing a K-1.

That K-1 will now have to go on my tax return as income. Will I have to pay taxes now? I still plan to deposit all the money into the Inherited IRA account I was told to open by my financial advisor.

[Opus 17]

Maybe, and no.

"Do I pay tax?"

This is a bit unclear to me, but if the estate liquidated the IRA, then I believe the estate must pay the income tax on the IRA, and you get whatever is left over.  The K-1 may indicate that you are getting the gross proceeds from the IRA and then you will have to pay the income tax.  This is probably better, since your tax rate is probably 12% or 22%, and the estate tax rate is 35%. 

"I will still put it in an inherited IRA."

No.  After the IRA is liquidated and you pay the tax, it's now just cash to you.  You can spend it, or invest it, and you might be eligible to make new contributions to an IRA (maximum of $6500, or $7500 if over age 55, and subject to all the other usual rules).  But you can't roll it over to an inherited IRA because if it was liquidated, the money is not in an IRA any more, its just money.

The decision to liquidate the IRA is unfortunate, and might be legally suspect, depending on the situation.  As an inherited IRA, you have the choice of withdrawing the money all at once or taking it out over 10 years, which allows you to spread out the taxes.  The estate liquidating the IRA is the same thing as if you got the inherited IRA and then immediately cashed it out and closed the account.  You owe the tax all at once, and you can't treat the money as special any more.  I don't know if the executor actually had the authority to do this, and it's probably not worth it to fight, and it may be unfixable anyway. But it's not an IRA any more.

[Anonymous_]

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@jeanmissor wrote:

.......liquidated the IRA account and is sending me a check and preparing a K-1.

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If you are getting a check and a K-1, then it is likely that the estate did not pay any tax that may have been due on the liquidation of the account. 

A K-1 (1041) reports items of income (gain), deductions, and credits. As a result, if the estate had paid the tax due on the liquidation of the account (and there were no final deductions), then you would most likely just be receiving a check for your share of the assets (which is now cash).

[rjs]

How exactly did you inherit the IRA? Were you named as a beneficiary on your friend's IRA, or did your friend's will say that you should receive a portion of the money in the IRA?

If you were named as a beneficiary the executor should have had the IRA custodian divide up the IRA and create an inherited IRA for you. It should not have been liquidated. That's why Opus 17 says that liquidating it is legally suspect.

Approximately how much money is your share of the IRA? If it's not a very large amount, then I agree with Opus 17 that it's not worth fighting about. Just pay the tax and move on.

It's not clear how you could open an inherited IRA account without a direct transfer from your friend's IRA. The account that you opened might not really be an inherited IRA. Is it actually registered as an inherited IRA with your friend named as the original owner? In any case, there does not appear to be any way that you can use that account, so you should close it.

[Critter-3]

Are you sure the retirement is being put on the K-1 form at all ?   That is not usual.  An IRA that is inherited is distributed outside of the estate so it should NOT be passed thru on the K-1 form. So talk to the estate administrator to find out what is actually  being passed thru to you ... did the estate sell off any properties, stock, income earned on bank accounts or something else?   

[Opus 17]

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@Anonymous_ wrote:

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@jeanmissor wrote:

.......liquidated the IRA account and is sending me a check and preparing a K-1.

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If you are getting a check and a K-1, then it is likely that the estate did not pay any tax that may have been due on the liquidation of the account. 

A K-1 (1041) reports items of income (gain), deductions, and credits. As a result, if the estate had paid the tax due on the liquidation of the account (and there were no final deductions), then you would most likely just be receiving a check for your share of the assets (which is now cash).

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This brings to mind one other possibility.

If the original IRA account owner is older than their "beginning year" (generally, age 70-72 depending on when they reached that age), they are required to take an RMD (required minimum distribution) every year based on the account size and life expectancy.  If they die before taking their RMD, the beneficiary must take the RMD and pay tax on it before any remaining balance can be rolled over into a new inherited IRA.

So it is possible, that the executor only withdrew the RMD, and that is what will be reported as income on the K-1.  Then, the remaining IRA balance is eligible for rollover into an inherited IRA with your preferred broker.  (It's never really "your" IRA and must be kept in a separate account from your own IRAs, even though you can use the same broker or bank.  "John Smith as beneficiary for Jane Doe's IRA" instead of "John Smith's IRA".)

Then you would be required to take an RMD (or more) starting in 2024, and withdraw all the money and close the account by 2033.

However, if the executor liquidated the entire IRA, the previous discussions apply.

[Anonymous_]

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@jeanmissor wrote:

....the attorney handling the estate....

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No one here is in possession of all of the relevant facts. The attorney, however, would be in possession of those facts and your questions would best be directed to that attorney. On this board, it's going to be nothing more than a guessing game.

[fanfare]

An IRA with a named beneficiary cannot be liquidated until the beneficiary gets their share transferred to a custodian.

Perhaps you were named as an heir to an estate that happened to have within it an IRA.

In New Jersey, if you are named, you are supposed to get a copy of the Will.

@jeanmissor 

[dmertz]

Based on the fact that the attorney obtained a distribution to the estate, apparently the estate was the beneficiary of the IRA.  If you were the designated beneficiary on the IRA, the estate had no claim to the IRA.  If you were actually a designated beneficiary, the IRA custodian should have rejected any attempt by the attorney to obtain a distribution, so it seems likely that the estate was indeed the beneficiary and because the attorney obtained the distribution payable to the estate, you did not inherit an IRA, you inherited cash.  

It's unfortunate that the attorney obtained a distribution from the inherited IRA because such a distribution is not permitted to be deposited back into an inherited IRA.  To be able to be maintained as an inherited IRA the attorney should have requested that your share of the inherited IRA for the benefit of the estate be transferred directly to an inherited IRA for your benefit without making any reportable distribution.

Because the distribution is not permitted to be put back into an inherited IRA, the distribution is taxable.  Presumably the estate will pass this income through to you to be taxed on your individual 2023 or 2024 tax return depending on the period covered by the estate's income tax return that includes this income.