30 Oct How are you taxed when you inherit an IRA?

Q. How is the beneficiary who receives the proceeds of an IRA due to the death of the IRA owner taxed? if the beneficiary of the IRA renounces the distributions, what are the tax implications to the beneficiary and to the decedent’s estate?
— Trying to understand

A. There are two different taxes in play: inheritance and income.

If the beneficiary is a spouse, a lineal descendant — child, grandchild, parent, grandparent, etc. — there is no New Jersey inheritance tax, said Michael Karu, a certified public accountant with Levine, Jacobs & Co. in Livingston.

He said there may be a federal tax, but that is dependent on both the type of beneficiary and overall value of the estate.

The proceeds of a traditional IRA are taxable to the recipient upon withdrawal, he said.

“If the primarily-named beneficiary renounces, the secondarily named beneficiaries become primary and would be entitled to the funds and the tax consequences thereof,” he said. “If no beneficiaries are named, the estate becomes the beneficiary and the proceeds are taxed in accordance with the terms of the decedent’s last will and testament.”

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This story was originally published on Oct. 30, 2020.

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