ira beneficiary tax treatment

[Guest leclark]

does a regular before-tax ira with a named beneficiary receive a stepped up basis at date of death? i guess another way of asking the question is how is beneficiary taxed on distributions?

[Appleby]

The “stepped up basis” rule does not apply to IRA assets. The assets distributed from the inherited IRA is treated as ordinary income (in the same manner as it applies to the IRA owner). If the IRA owner made non-deductible (after-tax) contributions to the IRA, these amounts represents basis in the IRA and will be tax-free when distributed. Distributions from IRAs that include basis are taxed on a pro-rata ( to include prorated amounts of pre and post tax assets) basis

[John G]

Applby - It might be helpful to also explain the treatment for a Roth. Some folks use Roth and IRA interchangeably.

[Appleby]

Good point John G.

For Roth IRAs, all assets credited to the Roth IRA as contributions and conversions are treated as basis (after-tax assets), and will therefore be tax-free when distributed. Earnings are tax-free only if the distribution is a qualified distribution.

Unlike the traditional IRA, assets distributed from the Roth IRA are not treated on a pro-rata basis. For instance, if the Roth IRA balance includes regular contributions and earnings, distributions will be deemed to occur from the regular contributions first. Distributed of earnings will occur only after assets representing regular contributions and conversions amounts have already been distributed.

For details on how distributions from Roth IRAs are taxed, see page 61 of the 2003 version of IRS publication 590 available at http://www.irs.gov/pub/irs-pdf/p590.pdf