basic question about retirement funds and wills?

[BossHogg]

Well this is about as basic as you can get

Lets say you have a family member and they passed away leaving you as a beneficiary on their retirement fund. Im guessing each retirement fund has their own set of rules, but in general do you have to pay tax on the money if you just take the money out of the account?

thank you SVTP

 

[oldmodman]

First question. What type of fund it it?

Roth Ira. All taxes have already been paid as long as the account is five years old or older.
If the account is for less than X number of dollars it may be free of taxes on the inheritance.

401K or SEP IRA. You will have to pay taxes on the amount that the account has earned, plus the original amount paid into the account. As to paying taxes on the inheritance amount after the initial taxes are paid I would contact a CPA or tax preparer.

Stock trading account. You would have to pay taxes on all profits. And get tax credit for the losses.

 

[ssssnake]

.....but in general do you have to pay tax on the money if you just take the money out of the account?

thank you SVTP

Yes you do have to pay tax on any money withdrawn on a traditional IRA. So, if you are going to cash a good sum in, you will need to have an accountant calculate what your tax amount will be. Something else to keep in mind. You can roll that retirement account over to your name if you'd like to. Here's some information from the IRS about inherited IRAs. Publication 590 (2008), Individual Retirement Arrangements (IRAs)

 

[ALsyr44]

Yes you do have to pay tax on any money withdrawn on a traditional IRA. So, if you are going to cash a good sum in, you will need to have an accountant calculate what your tax amount will be. Something else to keep in mind. You can roll that retirement account over to your name if you'd like to. Here's some information from the IRS about inherited IRAs. Publication 590 (2008), Individual Retirement Arrangements (IRAs)

Partly true. Technically you can only roll the money into another IRA in your name if you are a spouse bene. You can move it into an inherited IRA and the account would be registered as Jon Doe IRA Dec'd for the benefit of (bene name). The bene would be able keep the money in the account and would have to take payments every year based on their life expectancy. No new money can go into the account. If the bene is under the age of 59 1/2 they can take money out and not have to pay an early withdrawal penalty, but the money would be seen as income and taxed at the bene's tax bracket.

Pub 590 is a great resource if we are talking about a traditional or ROTH IRA. We don't know what type of account it is though. Could be a Trad, ROTH, SIMPLE, SEP, or SAR-SEP IRA, 403B, 401k and so on. The account type could chagne what options you may have.

But to answer the OP's question, if you were to take a lump sum payment, you would almost certainly have to pay tax on it regardless of the account type.