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    mariae557's Avatar
    mariae557 Posts: 1, Reputation: 1
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    #1

    Feb 21, 2008, 04:32 PM
    Inheritance Tax for a Minor child
    My daughter is going to inherit part of her late grandmother's retirement fund. The retirement company is asking me if we want them to take taxes out before they send us the money. I am not sure what I should do? What are the pros and cons? Is it taxable if it's going to a minor child? I have no experience in this matter and need advice.

    Thanks for any advice you can offer.
    AtlantaTaxExpert's Avatar
    AtlantaTaxExpert Posts: 21,836, Reputation: 846
    Senior Tax Expert
    		  
    #2

    Mar 7, 2008, 12:35 PM
    Yes, the money distributed to your daughter is VERY taxable, often at a rate HIGHER than your tax rate due to recent changes in the Kiddie Tax laws.

    Recommend that you have them roll the money over into arollover IRA in your daughter's name. That way, she gets a head start on saving for her eventual retirement.

    If you want the money, then have the custodian withhold the 20% in taxes. That way, when it comes time to file the tax return, you will have to scramble to raise the money to pay the taxes
    ebaines's Avatar
    ebaines Posts: 12,131, Reputation: 1307
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    #3

    Mar 7, 2008, 04:03 PM
    To be clear, the taxes that are owed are income taxes, not inheritance taxes.

    I agree that it is probably wise to have them withhold 20% for the taxes. However, I don't believe she has the option of transferring the assets to a rollover IRA - only a spouse is allowed to do that. Your daughter could roll it the assets into an inherited IRA account, but she will have to start taking minimum withdrawals by Dec 31 of the year following the IRA owner's death. I suppose they require this so as to avoid indefinitely postponing the payment of income tax on earnings in the account. So unfortunately this will not be a way for your daughter to start a nice retirement nest egg.
    MukatA's Avatar
    MukatA Posts: 7,110, Reputation: 176
    Tax Expert
    		  
    #4

    Mar 8, 2008, 09:26 AM
    Yes, any money or property you inherit you don't pay federal tax. But if you inherit Traditional IRA or retirement fund, then this is a taxable income.

    For more information read: Your Tax Return: Tax on Inheritances
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