Inherited IRA Options etc.
A 57 year old parent dies leaving a 25 year old child as the only beneficiary of his traditional IRA.
If the 25 year old elects to take the funds out periodically during the subsequent 5 years, does he/she have to pay any penalty on top of the ordinary income tax?
Would it be different if the child elects to make it a “stretch” IRA?
When taking distributions, is the child paying tax at his/her rate or the parents rate?
Thanks
Permalink Submitted by Alan - IRA critic on Wed, 2018-11-21 20:11
There is never an early withdrawal penalty on an inherited account. The only penalty exposure is for failing to meet the RMD requirement. The beneficiary can take out as much as they wish in any year in excess of the RMD, and will only owe ordinary income tax on the amount distributed. If the child stretches the inherited IRA, the same holds true, but distributions will be less and the IRA will have time to generate earnings since RMDs for young person are very low. The kiddie tax where the trust or estate rate applies does not apply to a child of this age.