08 Feb How will my inherited IRA and annuities be taxed?

Q. My father died recently. He has two non-qualified annuities and one IRA. I am entitled to one-third, along with my two sisters, of one annuity worth $76,000, a second worth $175,000 and the $360,000 IRA. Forms ask me to designate how much federal and state tax I want withheld. My father and both live in New Jersey. What should I choose?
— Beneficiary

A. We’re sorry to hear about your loss.

Let’s review the taxes that may be owed on both the non-qualified annuities and the IRA.

First, the IRA.

Assuming this is a traditional IRA, any distributions will be subject to both federal and state income taxes, said Joseph Sarnecki, a certified financial planner with U.S. Financial Services in Fairfield.

With the passing of the SECURE Act, you no longer have the ability to “stretch” the IRA over your lifetime, he said. Instead, you must deplete the account within 10 years.

“This means you can roll the funds over into an inherited IRA, for which there are no tax consequences, and then you can distribute the full amount in year one, year 10, or space out distributions over that time period,” Sarnecki said.

As each distribution out of a traditional IRA is considered ordinary income, every dollar will be income taxable, he said.

You can either withhold federal and state taxes upon the distribution, or the tax will be owed when you file your taxes for that year, he said.

“If you are to withhold, depending on your tax bracket, you will want to withhold the appropriate percentage amount,” he said. “You should consult your tax advisor for recommendations on this amount as they will have an understanding of your overall income, but in most cases spreading it out over several tax years versus taking it all in one year is a strategy worth considering.”

On the non-qualified annuities, as the money initially invested was with after-tax dollars, you will only owe income taxes on any earnings, Sarnecki said.

For example, if your dad had put $50,000 into the $76,000 annuity, only $26,000 would be income taxable upon distribution. This is also considered ordinary income and any withholding amounts should be discussed with your tax advisor, he said.

“Keep in mind that withholding is only paying the tax upfront,” Sarnecki said. “If you overwithhold, you will receive a refund when you file your taxes. If you do not withhold enough, additional taxes may be owed.”

Email your questions to .

This story was originally published on Feb. 8, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.