What Are the Tax Rules When the Estate Is Beneficiary of an IRA?


Quick Answer

Taxation rules that apply when the estate is a beneficiary of an IRA are based on the relationship of the beneficiary to the owner, the naming of the IRA and distribution deadlines, states Retirement Watch. If a non-spouse decides to rename the IRA, this exposes the benefits to ordinary income tax rates.

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Full Answer

The deadline for distribution is one year after the death of the owner of the IRA, after which the beneficiary loses the rights to distribution and heavy taxes are incurred, according to Retirement Watch. An early distribution ensures the 10 percent deduction is avoided, which is usually the penalty for late distribution. This applies to distributions done by the beneficiaries who have not reached the age of 59.5 years.

The relationship of the beneficiary to the owner of the estate dictates the level of power enjoyed by the beneficiary. If the beneficiary is a spouse, she enjoys the advantage of being able to roll over the IRA to one in her name, Retirement Watch explains. This also gives her the power to adjust the beneficiaries and the minimum required distribution.

In the case of multiple beneficiaries, the required minimum distribution is dependent on the age of the oldest beneficiary. Whatever investments made in such a situation depend on the agreement between the beneficiaries, states Retirement Watch. The rules on how to allow extra distributions also depend on what the beneficiaries agree on.

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