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Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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Beneficiary tax on IRA Annuity?

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We live in CA. My mom just passed away, and my two oldest siblings are the beneficiaries of my mother's IRA annuity account. The death benefit is the account value which is $28,292.00. They were planning to file a claim, and upon receiving the check, split the proceeds among all of the siblings. Who gets taxed on the money, and how is it done?


Hi and welcome to Just Answer!
As a recipient of inheritance - the person does not need to claim it as income. Regardless of the value. Please see for reference IRS publication 525 page 34 (left column) -
However - inherited IRA is different - because the distribution from IRA is IRD (income in respect of the decedent) and it is taxable the same way as if it woudl be taxable for the decedent - that amount will be included into taxable income.
If the annuity was purchased INSIDE IRA account - the death benefit are paid to the IRA account - and that transaction is not taxable - but when distributed out of IRA account - the distributed amount is taxable.


If your mother made any after tax contribution into IRA - that amount is distributed tax free. But if all contribution were made on pre-tax basis - the full amount is taxable. When funds are distributed out - that income is classified an income in respect of a decedent (IRD). Income in respect of the decedent is gross income that the decedent would have received had death not occurred and that was not properly includible in the decedent's final income tax return. Income in respect of a decedent realized AFTER the death is taxable the same way as it were taxable for the decedent. Income in respect of a decedent must be included in the income of one of the following.
--The decedent's estate, if the estate receives it.
--The beneficiary, if the right to income is passed directly to the beneficiary and the beneficiary receives it.
--Any person to whom the estate properly distributes the right to receive it.


When distributed - that amount is reported on form 1099R - which will report amounts of total distribution and taxable amount - AND the amount that was withheld
- from 1099R box 1 - total distribution
- from 1099R box 2a - taxable part of the distribution - if your mother made any after tax contributions - that amount would not be included. Otherwise - amounts in box 1 and box 2a will be equal.
- from 1099R box 4 - that is the amount of tax withheld which is credited toward tax liability.
In general - you may rollover funds into so-called "inherited IRA" and spread distribution over several years - thus effectively will reduce and defer your tax liability. Each beneficiary may have his/her own "inherited IRA" account.

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