How can I reduce the taxes on my inherited retirement assets?

By Denise Appleby AAA
A:

Many beneficiaries miss out on one of the most significant tax deductions for inherited retirement-plan assets; the income with respect to decedent (IRD) deduction. If you inherited retirement plans assets, check with the person who filed the decedent's estate return, to determine whether the decedent's estate paid federal estate taxes on the retirement account balance. (For more on this subject, see Tax-Saving Advice For IRA Holders.)

As the beneficiary, you may be eligible to offset or reduce any incomes taxes you owe on your distribution of your inherited retirement account, by claiming a deduction for certain taxes paid by the decedent's estate.

For instance, if you inherited a traditional IRA and the decedent's estate paid $100,000 in taxes attributable to the IRA, the taxable amount of the balance you inherit may be reduced by the $100,000. You may even be able to claim the deduction before the estate taxes have been paid. For instance, in Field Service Advice 200011023, the IRS allowed the beneficiary to claim the IRD deduction, even though the decedent's estate had not yet paid the estate taxes.

The IRD is deductible as an itemized deduction on Schedule A of your income tax return. (To read more about deductions, see Which is better for tax deductions, itemization or a standard deduction?)

If you inherited retirement assets, be sure to work a tax professional who can help you to claim the IRD deduction.

To read more frequently asked tax questions, see How do I avoid paying excess taxes on securities I have sold?, How can I make sure I'm ready to file my taxes?, What aids will help me file my own tax return? and Common Tax Questions Answered.

Question answered by Denise Appleby, CISP, CRC, CRPS, CRSP, APA

RELATED FAQS

  1. What's the difference between regressive and progressive taxes?

    Learn what a regressive tax is in comparison to a progressive tax, and understand the specific types of taxes that are considered ...
  2. Should I purchase a master limited partnership (MLP) in my retirement account?

    Learn why investors may have to pay taxes on dividends from master limited partnerships, or MLPs, held in individual retirement ...
  3. What are the tax implications of owning a master limited partnership (MLP)?

    Learn about the tax benefits of owning units in a master limited partnership, and understand how distributions are treated ...
  4. How should I invest the money I keep on my IRA?

    For individuals who are just starting to save, certificates of deposit can be a good place to start, but the interest rates ...
RELATED TERMS
  1. Current Service Benefit

    The amount of pension benefit accrued by an employee who had ...
  2. Contingent Beneficiary

    1. A beneficiary specified by an insurance contract holder who ...
  3. Self Invested Personal Pension (SIPP)

    A tax-efficient retirement savings account available in Great ...
  4. Elder Care

    Elder care, sometimes called elderly care, refers to services ...
  5. Deferred Tax Asset

    A deferred tax asset is an asset on a company's balance sheet ...
  6. Gold IRA

    Definition of Gold IRA

You May Also Like

Related Articles
  1. Trading Strategies

    Top 7 Roth IRA Stocks for 2015

  2. Bonds & Fixed Income

    A Look at the Pros and Cons of Muni ...

  3. Professionals

    Are Longevity Annuities in 401(k)s a ...

  4. Mutual Funds & ETFs

    4 Tax-Free Muni Bond ETFs to Consider

  5. Professionals

    Why Retirement Advice Is Better But ...

Trading Center