Retirement & Financial Planning Report

If an IRA owners dies and you’re the beneficiary, check to see which type you’ve inherited.

Traditional IRA. This is the most common type. If you are the beneficiary, you probably will owe ordinary income tax on all withdrawals. However, if the IRA owner had made any nondeductible contributions, some of your withdrawals will be tax-free.

Suppose, for example, you are the beneficiary of a $200,000 traditional IRA. If the IRA owner had made $10,000 in nondeductible contributions, 5% of the money you withdraw won’t be subject to income tax. In subsequent years, you’ll have to keep track of the nondeductible contributions you’ve withdrawn to see how much of each withdrawal will be tax-free.

Therefore, you should check the decedent’s income tax returns from prior years. If Form 8606 has been filed with those returns, that form will show the total of nondeductible contributions.

Roth IRA. These accounts are funded by nondeductible contributions. As long as a Roth IRA has been in existence for at least five years, all withdrawals by heirs are be exempt from income tax. Before the five-year mark, heirs may withdraw up to the amount of contributions, tax-free.