Sunday, September 21, 2014
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Everybody's Money Matters: Inherited IRAs, Gifting, and Taxes



This Q&A, based on a reader's submission to Everybody's Money Matters, earns her a $50 Visa gift card.

Q:

My husband's father recently passed away. He had an IRA (individual retirement account) worth approximately $60,000. His wife and each of five children will be receiving a check for about $10,000 from the IRA. Are we able to consider this a tax-free gift since it's less than $13,000, or will we have to pay taxes on this amount?

Susan
Preston, Minn.
Member, Mayo Employees Federal Credit Union

A:

We spoke first to a tax specialist at the Internal Revenue Service. He says that, regarding inherited IRAs, the person or persons who are beneficiaries of the IRA will be taxed the same way the original owner—your father-in-law—would have been.

So, if your mother-in-law is the sole beneficiary and takes out the IRA funds she will be taxed on the entire amount. If your mother-in-law and her five children each are beneficiaries, each beneficiary will be responsible for paying taxes on the amount he or she inherits regardless of the amount. "Gift" amount limits do not come into play in these situations.

If your mother-in-law were the sole beneficiary, she could cash in the IRA and then distribute a gift to each child. As long as the gift is under the $13,000 threshold the children wouldn't pay taxes. Since your mother-in-law would be responsible for paying taxes on the entire amount, though, the tax specialist suggested your mother-in-law consider accounting first for the tax she would owe and then determine how much to give each child.

"An IRA provides streamed lifetime income to fund retirement," says Dennis Zuehlke, compliance manager for Ascensus, Middleton, Wis., a company that provides retirement plan services to financial organizations nationwide. "As funds pass to beneficiaries, those funds will provide an income stream for those inheriting the IRA as well."

Zuehlke suggests younger individuals consider contributing to a Roth IRA if they believe they will be in the same or a higher tax bracket in retirement. You may withdraw regular contributions to a Roth IRA tax- and penalty-free at any time, for any reason. And, beneficiaries who inherit a Roth IRA only pay taxes on the earnings.

New for 2014: Everybody's Money Matters

Everybody's Money Matters gives credit union members and staff a chance to call the shots for topics in Home & Family Finance Resource Center, and to win prizes in the process.

If we develop a story, Q&A, podcast, or other content based on your submission to Everybody's Money Matters, we'll send you a $50 Visa gift card. Here's what qualifies:

  1. A consumer or personal finance question; or
  2. A story idea for a future issue; or
  3. A personal, true account of exemplary service or treatment by your credit union.

We're looking forward to your input. It will help us deliver content that's useful for our readers. This is fitting—the name Everybody's Money originated in 1961 as the quarterly magazine produced by the Credit Union National Association for credit union members.

This unique credit union idea is that credit unions use everybody's money to help all of their members.

Start submitting your ideas and questions now.



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