Taking Care of Mom and Dad: Inherited IRAs
Generally, a spouse can inherit an IRA or the proceeds of a 401(k) without paying any tax. So, if your dad dies, your mom can roll his accounts over into an account in her name...or can simply treat the inherited IRA as her own. In fact, unless your mom makes some other arrangement, the federal government will assume that she is treating your dad's accounts as her own.
If your mom receives a distribution from a qualified plan as a result of divorce or similar proceeding, she may be able to roll over all or part of it into an IRA. To remain tax-free, the distribution must be:
- one that would have been an eligible rollover distribution (defined earlier) if it had been made to the employee; and
- made under a qualified domestic relations order.
If anyone other than a spouse inherits a lump-sum distribution from a traditional IRA or Roth IRA that he or she has inherited, some or all of it may be taxable. The rule here is that these monies are taxed once. If the dead person had put pre-tax money into the IRA, the beneficiary will have to declare the inheritance as taxable income; if the dead person contributed after-tax dollars, the beneficiary is free from taxes later.
Generally, Roth IRAs are complicated when inherited. So-called "qualified distributions" from a Roth IRA are not subject to tax. A distribution made from a Roth IRA is "qualified" if it is made after a five-year period beginning with the first tax year in which a contribution was made to any Roth IRA of the owner.
Furthermore, in most cases, the entire interest in the Roth IRA must be distributed by the end of the fifth calendar year after the year of the owner's death -- unless interest is payable to a designated beneficiary over his or her life or life expectancy.
