Q. If I want to put an inherited IRA into a special needs trust, does the IRA have to be taken as a distribution with taxes paid first?
A. We’re glad you’re asking because both inherited IRAs and special needs trusts have specific rules.
However you take money out of an inherited IRA, you’re going to face taxes.
The beneficiary of an IRA has the ability to withdraw the funds and pay tax on the entirety, or take the full distribution within five years of inheriting the IRA and pay tax on the annual distributions, or defer using the Life Expectancy Tables as per IRS Publication 590 and, yes, pay tax based on the distributions taken, said Michael Karu, certified public accountant with Levine, Jacobs & Co. in Livingston.
The IRA cannot be transferred during the beneficiary’s lifetime with the exception of through a Qualified Domestic Relations Order in case of a divorce, he said.
“The beneficiary can name the special needs trust as his/her beneficiary,” Karu said. “However, the five-year rule applies and all funds must be distributed to the beneficiary trust within the five-year period.”
Email your questions to moc.p1550440864leHye1550440864noMJN1550440864@ksA1550440864.