IRA Held by An Estate -- Who Pays Taxes?

[jofijohnjoseph]

Hello,

I have a new client. Father passed away five years ago. His IRA did not have any designated beneficiaries, so the IRA has just been sitting untouched. The five year rule goes into effect on 12/31/22, so a final distribution needs to be made to the client soon.

My question is who is paying taxes on this final distribution -- the estate or the individual beneficiary? Morgan Stanley says they can only assign the IRA to the (still open) estate, and then a final distribution to my client can be made.

I am confused as to whether this needs to be reported as taxable income for the estate on a Form 1041, or if it will be reported as ordinary income to my client.

Thanks.

[IRonMaN · Accepted solution]

Sounds like the estate will get the check and then turn right around and pay the beneficiary which means the beneficiary will ultimately pay the tax.

[qbteachmt]

It seems Morgan Stanley is going to use the ID of the estate. That means any lump sum distribution will be in the "name" of the estate and use the estate ID. Lump sum distributions have required withholding.

Which 5 year rule? The one about dying before starting RMD?

[jofijohnjoseph]

The mandatory withholding requirement only applies to retirement account, not IRA, distributions. Per the IRS:

Will taxes be withheld from my distribution?

• IRAs: An IRA distribution paid to you is subject to 10% withholding unless you elect out of withholding or choose to have a different amount withheld. You can avoid withholding taxes if you choose to do a trustee-to-trustee transfer to another IRA.
  
• Retirement plans: A retirement plan distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll it over later. Withholding does not apply if you roll over the amount directly to another retirement plan or to an IRA. A distribution sent to you in the form of a check payable to the receiving plan or IRA is not subject to withholding.

Yes, the five year rule refers to the rule in situations where the deceased has passed prior to taking an initial RMD.