IRA federal and state taxes?

Question

I am widowed and have many IRA's of which my daughter will become the beneficiary. I understand that the tax implications will be great. Is this so? What can I do to minimize the taxes for her???

Answer 1

You have traditional IRAs.  The distributions from those IRAs will be taxed as ordinary income.

If your daughter is in a low tax bracket when she takes the distributions, her taxes are low.  If not, then the tax bite can be large.

What you can do now, if your tax bracket allows, is to move money from the traditional IRA to a Roth IRA.  You can do this in increments, so as to not move you into a higher tax bracket than you are now.  When your daughter inherits this money, it will be free of income tax.  When you move the money into a Roth IRA, you will pay taxes on the amount converted.

If she inherits money in a traditional IRA, she does not have to take a lump sum.  She can spread out her payments, depending on the status of the IRA when she inherited it (meaning were required distributions already in place).  When the time comes, she should determine all her options before taking a distribution.

If your daughter has children, you might want some of your IRA money bequeathed to them.  They may be in a low tax bracket and pay little or no tax on the distributions.

Answer 2

You should consult a local tax practitioner or estate planning attorney and set thing up so your daughter can inherit the IRAs not the money.  This way she will not owe any tax until she starts to withdraw the money.

Answer 3

Cash them out yourself and pay the taxes.

Your tax liability:  Big.  Hers:  Zero.

Other than that, there is nothing that you can do.  They will be taxable to her as she cashes them out.