Tax withholding on an inherited IRA from another state

Submitted by Rusty Nelson on Tue, 2020-04-14 16:13

My mom passed away in January and left her traditional IRA to my 4 siblings and me (divided equally 5 ways). My oldest sister is the executor for her estate and had my Mom’s IRA split up and setup as beneficiary IRA’s for us with her financial institution. It appears that my sister marked the federal and state (Kansas where my mom lived and died) withholding 20% and 10% respectively according to the documents I received from her. That means the state withholding goes to Kansas, I assume. I live in Minnesota. Do I have to pay income taxes on the inherited IRA in Kansas or for that matter the IRS when the funds are transferred to me in the beneficiary IRA? I thought taxes were only due and paid when any money was withdrawn from the beneficiary IRA recipient in the year it was withdrawn from the IRA. Any help with this would be appreciated.
Rusty Nelson



Submitted by Alan - IRA critic on Tue, 2020-04-14 16:39

  • Why is the executor involved in this? Did your mom leave her IRA to her estate or fail to name individual beneficiaries?   That’s the only way the IRA custodian should take direction from an executor. Now, it’s possible that the IRA was left to the estate and the executor assigned the inherited IRA out of the estate to the beneficiaries under mom’s will. In that case you would have your own inherited IRA and have full control of it including naming your own beneficiary and determining how to take distributions under the Secure Act. The transfer would not be a taxable event, and Mom’s 2020 RMD has been waived. Therefore, if you have your own inherited IRA, there should be no distributions processed yet, and you can change or delete any tax withholding elections. You may also want to transfer your inherited IRA to your preferred local or nationwide custodian.
  • Because mom passed in 2020, her IRA falls under the Secure Act. Therefore, the first question is – were you named individually as beneficiaries or was the IRA left to mom’s estate?  If estate, how old was Mom at her death?

Submitted by Rusty Nelson on Tue, 2020-04-14 17:42

Mom’s IRA is with Raymond James.  My sister (the executor) is handling all of Mom’s estate including the beneficiary IRA transfers.  The taxable portion of Mom’s assets have already been divided up and transferred to the 5 of us.  I am not involved with any of the financial dealings.  I do know my sister was required to send a notarized document titled Beneficiary Request Form IAD (a Raymond James form) to Raymond James.  It is a document with lots of information on it about the IRA and the beneficiary including the withholding information I am concerned about.  My Mom had a revocable trust and a will with the 5 of us as equal beneficiaries for her IRA.  I understand the new IRA tax law for the 10 year withdrawal change.  Maybe Raymond James wont withhold any taxes.  I haven’t received any IRA funds yet. Rusty Nelson 

Submitted by Alan - IRA critic on Tue, 2020-04-14 18:18

  • If you have your own inherited IRA account, you can change the withholding and eliminate it if you wish. There is no mandatory withholding for IRA distributions. You should have full control of the account including transferring it (by direct transfer only), naming your own beneficiary, changing the investments, and when and how much you wish to distribute. 
  • It still is not clear to me if you were named as IRA beneficiaries, her estate was the beneficiary or her trust was the beneficiary actually named on the IRA agreement. For example, if mom passed prior to her required beginning date and her estate was the beneficiary, you have 5 years to drain the inherited IRA, not 10.
  • If you were named directly as a beneficiary, James should only be accepting changes made by you personally. The account would show your mailing address, SSN, and beneficiary you named. It would be titled “Rusty Nelson as beneficiary of Joan Nelson” or similar showing both names. 
  • If you do not want withholding taken out, do not request a distribution until the withholding election has been changed. But you might want withholding (but for YOUR state) if you plan to take a large distribution and do not have a better way to pay your taxes.

Submitted by Rusty Nelson on Tue, 2020-04-14 19:17

I think I understand what y ou are saying.Rusty Nelson

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