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Ask the Expert: Rules about inherited IRAs

My wife inherited an IRA worth $135,000. If she cashes it in and pays federal and state taxes, must she declare the balance as income on next year's taxes?

If she cashes out the individual retirement account, the taxes on it will be due next April. She must declare the entire $135,000 as ordinary income on her 2021 tax return.

Alternatively, she could delay emptying the IRA until 10 years after its owner's date of death. She'd owe taxes on any withdrawals she took during those 10 years; but meanwhile, the account balance would keep growing on a tax-deferred basis.

With a few exceptions, IRA beneficiaries must now empty their inherited accounts within 10 years. The exceptions: surviving spouses; minor children (but not grandchildren); people who are disabled or chronically ill; and beneficiaries not more than 10 years younger than the IRA owner. (For example, if the owner was 88, the beneficiary can't be younger than 78.)

Surviving spouses can empty an inherited account over their own life expectancies. So can beneficiaries within 10 years of the owner's age. Minor children of the IRA owner must empty the account by their majority (age 18 in most states) or by age 26 if they're still in school.

Disabled and chronically ill beneficiaries can empty the account over their life expectancies. But to be deemed disabled, you must prove that you're unable to work for a long or indefinite period due to a medically determinable impairment. To be deemed chronically ill, you must be certified by a licensed health care practitioner to need assistance to perform at least two activities of daily living (such as eating or dressing yourself) for at least 90 days.

The bottom line

Many IRA beneficiaries can no longer postpone income taxes on their inherited accounts for more than 10 years.

More information

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