Ask the Expert: Tax rules for inherited IRAs

My adult son has inherited an IRA from his deceased uncle. I understand that distributions from this IRA must taken over the next 10 years. Will he owe a penalty on the distributions because he’s not 59½ years old? I also know New York doesn’t tax the first $20,000 of distributions to people who are older than 59½. How does this apply to those younger than 59½ taking distributions from an inherited IRA?

Your son won’t owe a penalty on distributions from his inherited IRA. IRA owners owe a 10% penalty on withdrawals taken before they turn 59½, but there’s no early withdrawal penalty on distributions that beneficiaries take from inherited IRAs, regardless of their age.

The New York Pension and Annuity tax exclusion applies to up to $20,000 of income from pensions, annuities and retirement accounts. All state residents can claim this tax break after they turn 59½. But an IRA beneficiary can also claim it on income from an inherited account, regardless of age, provided the deceased IRA owner would have been entitled to it if they were still alive.

Two caveats: If there are several IRA beneficiaries, they must share the $20,000 exclusion on a pro rata basis. If your son inherited 25% of his uncle’s IRA, for example, he can only claim a $5,000 tax exclusion. Also, the total exclusions claimed by the deceased IRA owner and the beneficiaries can’t exceed $20,000 in a single tax year. This means that in the year they inherit the IRA, the beneficiaries’ potential tax exclusion is reduced by the amount of exclusion claimed on the decedent’s tax return for that year.

The bottom line:

An IRA beneficiary can claim the New York pension and annuity tax exclusion on income from an inherited account.

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