Discussion:New Law Eases Taxes on Inherited 401(k)s
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Discussion Forum Index --> Tax Questions --> New Law Eases Taxes on Inherited 401(k)s
| 24 August 2006 | |
| Did ya'll see the WSJ article yesterday 8/23?
The article refers to "money from an employer sponsored retirement plans" Does this law change also apply to IRAs? | |
| 24 August 2006 | |
| Pension Protection Act of 2006 Rollover privilege extended to non-spouse beneficiaries. | |
| 24 August 2006 | |
| Yes, but why would you do it with an IRA? The thrust of the new law is that you can tranfer an inherited retirement account to an IRA and take IRA distributions over the beneficiary's remaining life expectancy. On an inherited IRA, you already have that option. | |
Actionbsns (talk|edits) said: | 30 March 2007 |
| My client inherited his father's IRA and has rolled it into an IRA of his own with a FMV of $55,000. Prior to this new law, such an IRA was taxable income because only a spouse could inherit an IRA tax free. If I'm interpreting what I have read in the Master Tax Guide and what has been commented on here, the $55,000 is tax exempt to the client. The exact phrase on page 664 of the Master Tax Guide is "This allows the beneficiary to take distributions from the IRA in accordance with the RMD rules, instead of taking the entire distribution into income in the year of the plan distribution". I have three questions: 1) am I understanding it correctly; 2) what are RMD rules; and 3) Is there an effective date attached to this that we need to pay attention to? | |
Death&Taxes (talk|edits) said: | 30 March 2007 |
| Began with distributions after 1/1/07 and I think you have the right idea. Seriously, Spidell's Elder Care Letter has had two excellent articles on this......one problem is that plans might have to be amended to allow such distributions. And in an earlier discussion, the transfer MUST be trustee to trustee. | |
| 30 March 2007 | |
| Yes, Paula, you need to pay attention to it. No you are not understanding it correctly. IRA has to be paid out over beneficiaries life (Required Minimum Distribution) I think the effective date is September following year of death, but you need to check. Normally the rollover is to an account titled Beneficiary IRA. | |
Actionbsns (talk|edits) said: | 30 March 2007 |
| The father passed away last spring, the client now owns the IRA. The 5498 says "Original Depositor: Name of Dad" and box 11 Required Minimum Distribution for 2007 is marked No. There's also an asterisked comment connected to IRA Type that indicates: "It is an IRS requirement to report Beneficiary Distribution Accounts as IRAs, Rogh IRAs, or SIMPLEs as applicable". Do I have a taxable event? What questions do I need to be asking the client? He took no distributions it's simply rolled over into his name and he's a 30 something so there won't be distributions for quite some time. | |
Actionbsns (talk|edits) said: | 31 March 2007 |
| OK, dug a little deeper, did a google search, found an very informative article that was enlightening and referred me to Publication 590 where all my questions are there to be answered in a mere 107 page document. Scanned it for what applies and, while these are great rules if your father dies in 2007, I don't think they do much for my client whose father died in 2006. But I am wondering why the 5498 seems to be in complete compliance with the new rules. Need to talk to my client and find out what he's been told about inheriting this because I think he may be in for a rude awakening. I had that happen to a person a couple of years ago, her share of her dad's IRA was about $150,000 - serious tax bite that one. D&T on page 3 of pub 590, heading Rollover by nonspouse beneficiary, it starts out with "Beginning in 2007, a direct transfer......", so I don't think this change affects anything until 2007 - the rollover, the inheritance, the distributions, etc.
Now if people will leave me alone I can reasearch, prepare taxes, prepare and file GE taxes, calculate payroll, copy a prior year return, go on line and order Girl Scout cookies. No, I mean go online and read things in Taxalmanac. | |
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