Having a Baby > Estate Planning Thanks Grandma! What You Need to Know About Inherited IRAs and the Gift Exclusion

Team PV

“So even if Grandma wants to gift me her IRA, the IRS is going to make her pay out? Hope Uncle Sam isn’t coming to Thanksgiving this year ‘cuz that will be awkward!” 

Uncle Sam isn’t into family discord either.

With the gift exclusion, you can gift or be gifted up to $14,000 per year without paying taxes on that gift. So if your parents want to help you and your spouse with a down payment for your home, they could give $14k to you and $14k to your spouse and no one would pay taxes on that total $28k.

You’re also allowed to fund a 529 plan with no penalties either. Fun fact: with a five year election loophole, your rich uncle could dump $70,000 into that 529 plan with no tax penalties either, provided he made no other gift to that account for five years.

And if Grandma wants to leave you her IRA, that’s cool too. It’s the gift that keeps on giving, minus any cheek-pinching. Let’s say Grandma names you the beneficiary of her $30,000 IRA, which you’re required to rollover to a designated inherited IRA beneficiary distribution account before December 31st of the year she passes away. If Grams was over 70 ½, you must take the required minimum distributions from the IRA. If you take just that minimum, the cash in the IRA can still compound year after year- the required distribution lowers with your age and your life expectancy. Grandma always knew you were smart. If you’re left with a Roth? No taxes and no worries if the account is at least five years old.

If Grams was under 70 ½, you’re required to take distributions according to the Five Year Rule. If you didn’t like rules to begin with, you probably won’t like this one. You can take as many distributions as you like without penalty as long as you clean out the account by the fifth year of Gram’s death; but the accelerated withdrawal schedule may still affect your tax situation. Use some of that inheritance to make an appointment with your accountant.

If you take out that inheritance in a lump sum distribution, that $30k is tacked onto your taxable income; and if that $30k pushes you into a higher tax bracket, you’ll really get owned by Uncle Sam. It’s the financial equivalent of putting your shoes on Grandma’s couch- just don’t do it. 

Like other estate taxes, what you pay depends on who you are. If you’re a surviving spouse, you assume the IRA as if it’s yours, including the same required distribution rules.


Photo: Heather Paque

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