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Financial Planning Question – Inheritance

 

Q: I need some advise to help my Mother, my Father passed away several years ago and controlled all of their finances. My Mom is 77 and is in the final stages of Cancer. My sister age 58, my brother age 52 and myself age 57 will inherit this and she is wanting to cash the $114K at Fidelity out as she is in a low tax bracket, as her only taxable income is the mandatory withdrawal per year and a $160.00 retirement check per month along with social security.

We know that this money is taxable and us children will be hit with much higher tax when cashed in otherwise. I know we can roll it over to our own IRA’s but with her minimal tax bracket is it wise to get the tax out of the way. If tax on this money is paid as income to her in the 2012 tax year will we inherit this money tax free?

A: First of all, I am very sorry to hear about your mother. I’m sure these are difficult times for you and your family.

With regards to your question, there are so many factors to consider that answering in this manner (via email) with limited details, is probably not appropriate. There are some points that are worth noting, though: Inheriting the IRA from your mother, you all will only have to withdrawal small percentages (that increase over time) of the account every year. At this point the % you would have to withdrawal in year 1 would be less than 3.50% of the total value. Therefore, this is a slow withdrawal rate of small amounts over a long period of time.
Your mother would be thrust into a tax bracket by taking out $114K at once. The question to ask is whether she is paying more taxes on the lump sum vs. you and your siblings taking out a couple thousand dollars at a time. You should discsuss this with a qualified tax advisor/CPA.

Assuming this is her only asset and she paid taxes on the withdrawal, you and your siblings would inherit this without owing any future tax except on gains and dividends/interest. Again, please confirm with a tax professional.


 

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