07 Jan Who pays taxes on this inherited IRA?

Q. I’m the executor of my mother’s estate. She has an IRA where the beneficiary is her estate. When I withdraw this IRA into her estate account, how will this money be taxed? Her will, which has passed through probate, gives the money to her three children.
— Executor

A. Distributions from an IRA are treated as ordinary income.

The distributions are taxed at the beneficiaries’ marginal tax rates, however, when an estate is an IRA beneficiary, the entire account must be withdrawn within five years, said Shirley Whitenack, an estate planning attorney with Schenck, Price, Smith & King in Florham Park..

“If the executor transfers the IRA into inherited IRAs for each of the beneficiaries, then the beneficiaries would pay the taxes,” she said. “If the executor withdraws the IRA assets, then the executor would pay the taxes.”

In that case, the taxes would be paid from the estate assets, she said.

Before you make a move, ask the custodian of the IRA if it would be willing to split the account into three IRAs for the beneficiaries.

If that works, each beneficiary will have to pay income tax when the distributions are made and all of the IRA assets must be distributed within five years, Whitenack said.

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