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Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 482
Experience:  Former IRS Revenue Agent
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My minor son is the beneficiary of an annuity left by my

Customer Question

My minor son is the beneficiary of an annuity left by my deceased mother. The value of the annuity is approximately $14,000. Our intent is to roll that into a UTMA account. The distribution form is asking for an amount to be withheld for Federal and State (Ohio) taxes, if any. My question is if this is treated as a retirement plan and as long as 100% is rolled over there are no tax implications? With my son being a minor I wasn't sure if we should have taxes withheld from the distribution?
Submitted: 11 months ago.
Category: Tax
Expert:  Dr. Fiona Chen replied 11 months ago.

Dear Customer,

A death, inherited IRA, unless is spousal transfer, demands immediate required withdrawal. The length and amount of withdrawal can be considered. Your minor son can take it out as minimum distribution over his life time.

Below is a citation from an IRS website. Two links are also attached for your reference.

It seems that this "transfer" you are considering as "roll over" could be considered as "total distribution" by the insurance company.

Please don't do it yet until you are very sure.

What your son should do is to transfer the annuity to a inherited IRA account. Ask the insurance company how it can be done. Then, he is to immediately start to withdraw based on the law. If you would like to keep the tax to the minimum, then, he can withdraw with his expected life time. Because the insurance company is required to withhold tax, you can let them do so with the lowest percentage they are willing to do, say 10%. Then, when you report tax on your son's tax return, say if he gets $600 distribution in a year, it is likely that he would not owe tax, then, the tax withheld will be refunded to him.

Please make sure that the account he is transferring to is titled with his name and specifically titled "INHERITED IRA" account. This is very important. Please continue to read on the citation and links. Feel free to follow up with questions.


Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP

Inherited from someone other than spouse. If the inherited traditional IRA is from anyone other than a deceased spouse, the beneficiary cannot treat it as his or her own. This means that the beneficiary cannot make any contributions to the IRA or roll over any amounts into or out of the inherited IRA. However, the beneficiary can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of the beneficiary.

Like the original owner, the beneficiary generally will not owe tax on the assets in the IRA until he or she receives distributions from it.

Customer: replied 11 months ago.
I would prefer to have it transferred in full to a UTMA account instead of periodic payments to an IRA because I would like these funds available to him for distribution for school expenses (but not into a 529 account), or for other non-educational needs. It was originally gifted to my mother when my son was born for future potential medical expenses due to complications he had as an infant. Now that he's older and those expenses are no longer expected, we would like to use it toward college expenses if he attends or other needs if he does not go to college. He is 11 years old currently, so we don't know yet if he plans to attend college.Given these additional facts, would you advise for/against having 10% withheld for Federal and 5% for Ohio state taxes and have the full amount moved into a UTMA? I'm unsure if he would have much of a tax liability on $14k if he has no other income, or if there would be some type of tax liability on my wife and I's tax filing?
Expert:  Dr. Fiona Chen replied 11 months ago.

Dear Customer,

An UTMA account has shelter for earnings, but not its contribution.

The contribution into the account is the after tax money.

The inherited IRA account is established at once. It is not periodic payment into an IRA.

It seems that you are interested to withdraw at his age to college. So, you may want to consider the five-year rule. That is, the inherited IRA can be held until the end of the fifth year for withdrawal the whole amount. You postpone the tax until five year later.

5-year rule. The 5-year rule requires the IRA beneficiaries to withdraw 100% of the IRA by December 31 of the year containing the fifth anniversary of the owner’s death. For example, if the owner died in 2015, the beneficiary would have to fully distribute the plan by December 31, 2020. The beneficiary is allowed, but not required, to take distributions prior to that date. The 5-year rule never applies if the owner died on or after his or her required beginning date.

To withdrawal all 14,000 in one year, you can chose to report his income on your return. You possibly can know that tax effect, but still consult your tax return preparer. Any increase can cause all your tax credits and allowance of certain deductions change.

I did a test run using my 2015 tax software, when he reports on his return as a dependent on someone's return, his tax is 1,747.