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Caveat to Taxation of Inherited IRA Distributions

Posted on: November 14th, 2016
inheritance taxDistributions from an inherited Individual Retirement Account (IRA) generally are taxable in the year the distributions occur. However, Internal Revenue Code 402(c) provides for an exception: Distributions rolled over to a separate retirement plan established for the beneficiary. There is a caveat to this exception, which was recently highlighted in Letter No. 2016-0062 from the Internal Revenue Service.

IRS Letter No. 2016-0062 pertains to an attempted rollover implemented by a surviving son from his deceased father’s retirement account. The decedent’s accounts were employee retirement accounts, to be paid to a non-spouse. Under IRS Code 402(c)(11), retirement account distributions of deceased employees that are transferred to a retirement account established for a non-spouse beneficiary may be eligible for the tax-free rollover. However, the IRS noted that the accounts in question here were not rolled over into another retirement account established for the son’s benefit, but rather were paid to the son directly, and thus did not qualify for the Section 402(c)(11) rollover exception.

Individuals who are interested in the long-term growth and preservation of retirement assets for loved ones may implement planning efforts that include IRA Beneficiary Trusts or Standalone Retirement Trusts. These trusts are especially useful when an individual has multiple retirement accounts, non-spouse beneficiaries, and concern for creditor/estate claims. 

Curious how your retirement assets will be taxed when they pass to loved ones? Schedule time with one of our tax attorneys to discuss more.
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