What taxes will be due on these inherited IRAs?

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Q. Both parents passed earlier this year within a matter of weeks of each other, without time to change any designations. On their individual traditional IRAs, each was the other’s listed beneficiary. If distributed directly to the estate, both distributions will be fully taxable to the estate, but at what federal income tax rate? Also, does distributing the account in full during this year negate the annual RMD requirement for this year?
— Beneficiary

A. We’re sorry to hear about the loss of your parents.

Because your second question is the easier one, we will answer it first.

If the IRA is distributed in full during the year, it meets the annual RMD for the year and negates any future RMDs as there is no balance in the account, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.

We’re assuming that neither of your parents had contingent beneficiaries listed on their IRA accounts, which Romania calls “unfortunate.”

“Absent some other provision – such as in a will or trust – governing survivorship, a beneficiary who does not survive for a period of 120 hours will be deemed to have predeceased the decedent,” she said. “Assuming the second death occurred following such a time frame, which would have voided the bequest, the first IRA passed to the surviving spouse at which time both IRAs passed to the surviving spouse’s estate.”

More specifics about how the distribution will be made would be needed to be sure.

However, Romania said, under current law, if the participant of an IRA was taking RMDs from his or her IRA at the time of death, and if there is no designated beneficiary named, then generally RMDs will be made to the estate based on the participant’s life expectancy — the age at the time of death.

If the participant was not taking RMDs at the time of death, then no distributions will be required until the end of the fifth year, she said.

“The distributions will incur income tax at the estate level except to the extent distributed to the beneficiaries of the estate in the year taken,” she said. “Estates are taxed at the highest tax rate with as little as $14,451 of taxable income, whereas, individuals are not taxed at the highest tax rate until they have earned approximately 40 times said amount.”

For that reason, she said, it is generally — but not always — better to pass the income through to be taxed at the beneficiaries’ levels.

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This story was originally published on May 23, 2023.

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