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Question for the Money Doctors

Question submitted on Oct 3, 2021.

Question

My mother recently passed away in another state. When filling out beneficiary i have to chose whether to take cash or roll it over. What are the tax implications of taking a lump sum?

Answer

Although it isn't clear from your question, it sounds as though you've inherited an IRA.  You should confirm this since the rules will be different if it's another kind of account.  Unless the IRA is a Roth IRA, anything you don't roll over will be considered taxable income to you.  The distributions that you take from a traditional IRA which you have inherited will be considered taxable income in the year in which you receive it.  The rules require most beneficiaries to fully deplete an inherited IRA within 10 years if the account owner died after 2019.  If you have inherited a Roth IRA, there will be no tax on the distributions but you will still have to deplete the account within 10 years.  Since a taxable distribution from an inherited IRA could push you into a higher tax bracket, you may want to consult with a CPA or financial planner who can help you decide whether it makes sense for you to take the distribution right away, spread it over the 10 years, or defer it to a future date when you might be retired yourself and in a lower tax bracket. 


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