Readers in the Seattle area who anticipate inheriting a loved one's individual retirement account may want to take note of some frequently disregarded considerations that can have serious inheritance tax consequences. As long as taxpaying beneficiaries act quickly and avoid some common mistakes, certain opportunities are available to increase the long-term value of an inherited IRA and avoid double taxation.
IRA assets and other retirement assets generally pass to heirs outside probate, so small but important considerations can be easily overlooked in the complexity of probate proceedings. Seeking professional advice during estate administration need not be overly stressful or expensive, and can save a bundle at tax time.
One of the most common mistakes many IRA beneficiaries make is simply forgetting to claim a tax deduction for income gained through cashing out an inherited IRA. As a general rule, tax will be paid by the estate for the value of a retirement account. Forgetting to claim the deduction means that an IRA effectively gets taxed at the estate level and then again as personal income.
Another easily forgotten consideration is the manner in which an inherited IRA is re-titled. When an account is not cashed out completely, tax savings can be gained or lost depending on the relatively simple matter of how the account is renamed.
Finally, beneficiaries with children should remember that the option is available to disclaim an inherited IRA. Handled properly, an IRA can be passed on to a beneficiary's children. IRA beneficiaries who don't need to rely on the account assets during their lifetimes can defer benefits with tax advantages for their children.
Handling an inherited IRA to reduce tax burdens and prolong the benefits of the account can be a relatively simple matter. Beneficiaries will want to be aware of the steps they can take and the mistakes they should watch out for in order to make the most of their inheritances.
Source: The Wall Street Journal, "Inherited IRAs: a sweet deal," Kelly Greene, April 13, 2012