Inherited IRA Tax Savings

When clients or prospective clients tell you about having an inherited retirement plan or inherited IRA account, be sure to inquire whether or not the decedent's estate paid estate taxes. If estate taxes were paid on the value of the deceased's retirement plan accounts, then the beneficiaries of those inherited accounts can receive an income tax deduction for distributions up to the amount of the estate tax paid on the account.

It is calculated by determining the amount of estate tax with the retirement account included in the estate and without it. The difference in estate tax is attributable to the retirement account and is available to the beneficiary as they withdraw funds from the inherited account until exhausted.

This tax break is often missed by beneficiaries and their accountants who may not know whether or not an estate tax return was ever filed.