tax consequences of ira recieved as a death benefit?

Question

I am a beneficiary of an IRA, does anyone know that tax consequences of removing money from that IRA once it has been distributed, or a website that could explain how it works.

The decedent was 63 when he passed if that makes any difference.

Thank you

Answer 1

Here is an article that explains the new rules for IRAs inherited from deceased persons starting in 2006:

http://www.fool.com/investing/ira/2006/08/23/how-to-inherit-an-ira.aspx

You have some options as to how to take the money. You have to move the money into an inherited IRA account, you can't move it into your existing IRA account (unless you are a spouse). You may be able to take distributions over your own life expectancy from the inherited IRA. You could also opt for the old "five year rule" where you take the entire distribution no later than the end of the fifth year after you inherit the IRA.

The financial institution that holds the IRA should be able to help you establish the account and distributions that suit you best.

Assuming this is a traditional IRA, your distributions are taxable as ordinary income.

Answer 2

Any funds you take out are taxed as ordinary income. You are not taxed until you remove funds from it. You do not pay the 10% penalty tax.

Since the account was tax-exempt going in, you do not get the stepped-up basis that you would receive on other assets passed to you through inheritance.