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Inherited IRA Beneficiaries Separately Responsible for Taxes on Separate Shares


A new PLR confirms: When multiple beneficiaries inherit an IRA, each beneficiary is independently responsible for any income taxes and/or penalties assessed on their share of the inheritance. Proper accounting must be done to ensure accurate accountability of individual responsibility.

Beneficiaries who inherit IRAs are responsible for paying any income taxes owed on tax deferred amounts that they distribute from the inherited IRAs. If there are multiple beneficiaries of one IRA, each beneficiary is independently and separately responsible for any income taxes owed on his or her share. Taxes are usually assessed on amounts that are distributed, for the year in which the distributions occur. This includes required minimum distributions (RMD).

Inherited IRAs are subject to RMD rules, and failure to take RMDs by the applicable deadline would result in the offending beneficiary owing the IRS a 50% excess accumulation penalty on the RMD shortfall. If an IRA is inherited by multiple beneficiaries, individual beneficiaries are separately responsible for any excess accumulation penalty owed because of any RMD shortfall for his or her inherited share.

Taxation status of moving inherited IRAs to beneficiaries

Generally, when a beneficiary inherits amounts held in an IRA, that amount is moved to an inherited IRA, using the trustee-to-trustee transfer method. The inherited IRA is required to be properly titled in accordance with IRS requirements, which state that inherited IRAs must be registered in the name of the decedent for the benefit of the beneficiary, and the transfer is nonreportable and nontaxable.

Separate RMD requirements for multiple beneficiaries

If an IRA is inherited by multiple beneficiaries, RMD requirements and excess accumulation penalties apply separately to each beneficiary, based on the beneficiary’s separate share of the inherited IRA. Each separate share is determined at the time of the IRA owner’s death, adjusted for gains and losses on a pro-rata basis until the transfers occur. Once the transfers are completed, gains and losses for each inherited IRA is based on the performance of the investments for each of those separate IRAs.

SOURCE: TheHorsesMouth.com

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