Tax Liability When Closing IRA Account for Deceased

by Alexis Lawrence

When the owner of an IRA dies, the IRA transfers into the ownership of the beneficiary listed on the account. As the heir to the account, the beneficiary may have some tax liability. However, this liability does not kick in until the beneficiary withdrawals the funds from the account, such as in the case of closing the IRA.

IRA Passed Down

The inheritance of an IRA, whether as a direct beneficiary, or through a family trust, comes with no immediate tax liability. Since an IRA pays out distributions based on a set schedule, the heir of an IRA begins receiving payments from the IRA in the same fashion as the original owner. When the heir receives these distributions, he must declare the distributions as a portion of his income on his tax return until the trust is closed.

Taking Out Money

As a beneficiary, you may continue to receive the payments from an IRA, according to the distribution schedule, without closing the account. However, if you want to close the IRA, you must withdraw all of the funds in the account at one time. Since this money goes onto your taxable income, depending upon the amount of the withdrawal, it may increase your tax bracket, so the amount of taxes owed on the money may be more than if you continued to accept the funds in distributions.

Choosing Not to Close an Account

Though you must pay income tax on the distributions from an IRA, since those payments add up to less income each year than taking a lump sum distribution, the tax liability is often less than it would be if you were to close the account and take the money out in a lump sum. With non-qualified IRAs, those not funded pre-tax, such as a Roth IRA, however, you must close and withdraw the funds within five years of inheritance.

Spousal Beneficiary

If the beneficiary of the IRA is the spouse of an owner, the heir has more options when it comes to closing the IRA. Instead of having to withdraw all funds from the IRA, the spousal heir has the option of rolling the funds from the IRA over into his or her own personal IRA or changing the name on the inherited Ira to his or her own name. This allows the funds to continue to grow tax-free until the spousal heir’s own retirement.

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