14 Nov I didn’t withhold taxes from this inherited IRA. What should I do?
Q. My brother passed away last year and I was named the executrix in his will. He had a traditional IRA with Vanguard. Today, I closed the IRA and requested a check be made out to his estate. I finalized the transaction and cannot make any changes but I think that I made a mistake. I did not have the 10% federal tax withheld. Will the federal tax be paid from the estate account and if so, how does that work? He had another IRA with Charles Schwab but I have not closed that account yet. I’m not sure whether to have the federal tax withheld or not. The estate is going through probate.
A. We’re sorry to hear about your brother.
There are several items you need to worry about as the person in charge of settling the estate.
And you didn’t say who the beneficiary of the account is, so this may be advice you want to share with the beneficiary if it’s not you. It’s also possible your brother’s estate ended up as the beneficiary, based on your description.
If you inherit a traditional IRA and do not have the required 10% federal tax withheld, you may still owe federal income tax on the distribution when you file your annual tax return, said Ryan Zacharczyk, a certified financial planner and president of Zynergy Retirement Planning in Red Bank.
He said the IRS typically requires a mandatory 10% withholding for federal income tax when a distribution is made from an inherited traditional IRA, unless you choose to have no withholding or a different amount withheld by submitting a Form W-4P to the IRA custodian.
“The federal tax liability on the inherited IRA distribution is your responsibility to report and pay when you file your federal income tax return for the year in which you received the distribution,” Zacharczyk said. “The amount of tax you owe will depend on your total income for the year, including the distribution from the inherited IRA.”
Regarding the payment of federal tax through the estate account, Zacharczyk said it’s important to note that the tax liability for an inherited traditional IRA generally falls on the individual who inherits it, rather than the decedent’s estate.
“The estate itself typically doesn’t pay the income tax on the distribution from the inherited IRA,” he said. “It’s advisable to consult with a tax professional or estate planning attorney who can provide guidance specific to your situation and ensure compliance with tax laws in both New Jersey and at the federal level.”
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This story was originally published on Nov. 13, 2023.
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.