IRA Inheritance Tax planning

[mawlers]

My grandmother passed away in April of 2007. She has an IRA of about $14,000 that my mom inherited.

She wants to withdraw this money with minimal taxes. She is planning on putting the money into an IRA to help with this. Whatever she takes out, she will roll into an IRA of her own.

Is it better for her to take it out as a lump sum and then put it into an IRA or to take out $2,000-$3,000 a year and roll that into an IRA of her own?

My parents are in the 15% tax bracket.

[OldJack]

I believe that only a spouse can roll an inherited IRA. See TheTaxBook page 13-23 subject "Not allowed as a rollover" *Distributions to the plan participant's beneficiary (exceptions apply for a spouse of the plan participant).

edit: also further discussion on page 13-25. And page 13-26 allows direct trust to trust roll by the trustee but benefit distributions rules would still apply.

[mawlers]

Thank you for your response. Let me clarify a little more.

My mom isn't actually trying to roll it over because she knows that she cannot but she is going to make a contribution with the money for an IRA in her name. The idea behind this is to maybe counteract the income hit she is taking. As a result, she is trying to figure out what is the best way tax wise to do this. Take it as a lump sump or over time.

I believe that only a spouse can roll an inherited IRA. See TheTaxBook page 13-23 subject "Not allowed as a rollover" *Distributions to the plan participant's beneficiary (exceptions apply for a spouse of the plan participant).

edit: also further discussion on page 13-25. And page 13-26 allows direct trust to trust roll by the trustee but benefit distributions rules would still apply.

[OldJack]

>>The idea behind this is to maybe counteract the income hit she is taking.<<

Assuming your mother has sufficient earned income, not participating in an employer retirement program, and meet all the requirements to make a contribution to a traditional IRA, then that would work effectively zeroing out the tax due on distribution.

However, depending upon the age of your mother, you are only deferring the tax as sooner or later your mother or beneficiary would have to take the taxable money out of the IRA.

[jainen]

stay within the 15% bracket

>>Is it better for her to take it out as a lump sum and then put it into an IRA or to take out $2,000-$3,000 a year and roll that into an IRA of her own?<<

Using a direct trustee-to-trustee transfer, she can roll over all or a part of the IRA into her own separate account. That in itself does not change the requirement to take distributions, so the decision involves only non-tax issues about managing the funds.

She can offset the tax effect of the distributions with whatever regular IRA contributions she is permitted to make. If she waits until after the end of the year she can fine-tune her contribution to stay within the 15% bracket.

[OldJack]

>>Using a direct trustee-to-trustee transfer, she can roll over all or a part of the IRA into her own separate account.<<

I guess it is just the wording "roll over" that I have a problem with in your statement. Fact is she does not qualify for a "roll over" transfer. I don't know, will a trustee do a direct transfer and call it a distribution? I expect they will.. I just have not seen it done that way.

[jainen]

New rules

>>I just have not seen it done that way<<

New rules for 2007.

[OldJack]

New rules for 2007.

I guess thats why I have not seen it done. Damm, I thought I had read all that stuff.