Retirement Accounts and Unique Tax Rules During Trust Administration

What Retirement Account Assets are not Exempt from Tax Rules During Trust Administration?

For most assets, no federal income tax is due by the beneficiary or heir who inherits the property. The trustee or executor instead pays taxes during the trust or estate administration process. There are some exceptions to this general rule, however. Certain retirement account assets do not avoid federal income tax liabilities in the same manner as other assets. Continue reading to learn more about tax rules during trust administration.

What Happens to Inherited IRA’s and Retirement Accounts?

Unlike most other assets that are distributed during the administration of an estate, inherited IRAs and retirement accounts are subject to federal income tax. These types of assets may include any of the following:

1. 1. Money held in traditional IRA’s
   2. Money held in employer-sponsored retirement plans such as 401(k)’s and 403(b)’s
   3. Money held in annuities

These assets are taxed directly to the heir who receives the asset. The IRS refers to it as income in respect of a decedent. There are three exceptions, however. These include:

1. Roth IRA’s
2. Roth 401(k)’s
3. Inherited IRA’s

When is there no Federal Income Taxes Due on the Distributions?

As long as the Roth IRA account has been open for at least five years prior to the owner’s death, no federal income taxes are due on the distributions. If the owner does pass away during that five year window, the beneficiary can still avoid paying federal income taxes by rolling the account over into an inherited Roth IRA and waiting until the holding period has passed. Roth 401(k) accounts can also be rolled over into an inherited Roth IRA. Heirs to a Roth IRA must either withdraw all of the funds within five years of the original owner’s death or take annual minimum withdrawals over the course of their lifetimes.

Similarly, beneficiaries of a traditional 401(k) and similar tax-deferred employer-sponsored retirement plans can roll the accounts over into an inherited IRA. This allows them to spread their distributions and associated tax bills over their lifetimes.

More About Tax Rules During Trust Administration:

Unfortunately, tax responsibilities do not die with us when we pass.  To learn more about taxes and trust administration, we encourage you to contact us directly—we are standing by to help.