Readers clarify taxing of inherited IRA account

Fret not, Utahns. Tax experts live among you, and they stand ready and willing to help!

That's what I discovered as a result of last week's column, in which I sought an answer to a reader's question about inheritance of an individual retirement account.

As you may recall, Lloyd wanted to know the percentage tax rate for an inherited IRA, and whether there is any way to avoid those taxes.

Preston Eichers, CPA with Hansen, Barnett & Maxwell in Salt Lake City, helped me with the answer, and after several e-mails, we discovered that one piece of information he passed along was in error. The column indicated that an estate would have to be larger than $2 million to pay any federal estate tax.

Several readers pointed out that, in fact, the "applicable exemption amount" for the federal estate tax in 2009 is $3.5 million. Thanks to all of you for that correction. Both Preston and I regret the error, and I corrected it online and in print as soon as I could.

Further responses shared other information about inheriting IRAs, and I wanted to pass those along, too.

One reader, who wished to remain anonymous, pointed out that a surviving spouse who is a beneficiary of an IRA can transfer the account to her name with no taxable event until she is required to withdraw funds under the required minimum distribution rules.

"They can transfer to other custodians, combine it with other accounts, etc.," our anonymous reader wrote in an e-mail. "See IRS publication 590 page 20, available at www.irs.gov."

He said the IRS also allows non-spousal beneficiaries to transfer to an IRS-approved "inherited IRA."

"While your article said 'inherited IRA funds,' it did not talk about 'inherited IRAs' as such," he wrote. "It did talk about withdrawing the money and those attending tax payments, but it did not talk about transferring funds to an 'inherited IRA.'

"The rules, especially for 'inherited IRAs,' are very complex, but they do allow for taxes to be spread out or possibly delayed for a non-spousal beneficiary. Of course, this would probably reduce taxes substantially for many or most people. I suspect that very few people would get into estate tax issues at all with 'inherited IRAs.' "

He says the IRS Web site has a wealth of information about such topics, and he's right.

A reader named Henry took our anonymous reader's advice one step further with an easy-to-understand example.