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estates, trusts, wills

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lindacarroll

Junior Member
What is the name of your state (only U.S. law)? California
My husband died in Feb. 07 and for the past 10 months my step son and I have been working to reach a settlement of my husband's estate. He established a will and trust before our marriage and designated his son as the beneficiary. One part of the estate was an IRA worth $137,000 and as part of the settlement I will receive 20%. I am currently 48 but will need the $27,500 to finish the house we were building together. What tax liability will I face if I take the $27,500 to finish my house? I will also need to take out a mortgage (I would be a first time home buyer) for $85,000 to pay off my step son for his share of the house.What is the name of your state (only U.S. law)?
 


tranquility

Senior Member
The distribution from the IRA will be income and you will pay a 10% federal penalty (and a state penalty) for early distribution.
 

anteater

Senior Member
Hey Tranq, how are you doing?

If it is an inherited IRA, isn't the distribution exempt from penalty? As long as she does not roll it into her own IRA?
 

lindacarroll

Junior Member
wills, trusts, and IRAs

Thank you both for the reply, but now I am curious if the IRA will be exempt from taxes because it was inherited?
 

anteater

Senior Member
Unless it is a Roth IRA, it would not be exempt from income tax. What I was querying tranquility on is whether the 10% early distribution penalty would apply.

A surviving spouse has two options when inheriting an IRA:

1) Unlike non-spouse beneficiaries, the surviving spouse can treat the IRA as their own rather than as an inherited IRA.

2) Maintain it is as an inherited IRA.

My understanding is, if the choice is #1, then the normal rules apply if distributions are taken before 59-1/2. The 10% early distribution penalty applies.

However, again my understanding, the 10% early distribution penalty does not apply to distributions from an inherited IRA.
 

FlyingRon

Senior Member
If the son is the beneficiary (either in whole or part) the spousal transfer is not an option.
If she'd have gotten all of it, she could have just treated it as her own IRA and the rules would be the standard IRA rules as if it had always been her IRA.

However, since some of the money is going to someone else, the the options are to take the money out immediately or put it into one of two forms of inherited IRA. However, it makes no difference. Al three options are not subject to the 10% penalty
 

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