Dealing with the New Jersey Inheritance Tax and an IRA Account (2024)

FAQs

Dealing with the New Jersey Inheritance Tax and an IRA Account? ›

Class A and Class E beneficiaries are exempt from the inheritance tax. Still, Class C and Class D beneficiaries must pay tax on the value of the IRAs they inherit, at graduated rates that max out at 16%. For income tax purposes, withdrawals from these inherited IRAs will generally be taxed to the beneficiary.

Taxation of an inherited IRA depends a lot on the type of account you inherited. For instance, you must pay ordinary income taxes on money taken out of a traditional IRA. But taxes aren't imposed on a traditional IRA that you inherit.

If you inherit a Roth IRA, you're free of taxes. But with a traditional IRA, any amount you withdraw is subject to ordinary income taxes. For estates subject to the estate tax, inheritors of an IRA will get an income-tax deduction for the estate taxes paid on the account.

New Jersey law puts inheritors into different groups, based on their family relationship to the deceased person. Class A beneficiaries are exempt from the inheritance tax; they pay no inheritance tax. This group includes the deceased person's: spouse, domestic partner, or civil union partner.

There are a few things you can do to avoid paying taxes on an inherited IRA. The most obvious thing is to not take a lump-sum distribution. If you inherit the IRA from your spouse, wait until the required minimum distributions begin or take distributions based on your own life expectancy.

Whether inheritance taxes are due and the amount will vary based on several factors, including the beneficiary's relationship to the deceased. An inheritance bequeathed to a spouse is exempt in New Jersey, and inheritances to children are also tax-free.

However, distributions from an inherited traditional IRA are taxable. This is referred to as “income in respect of a decedent.” That means if the owner would have paid tax, the income is taxable to the beneficiary. If you inherit the IRA from your spouse, you have the option to treat the IRA as your own.

Options for Funds Inherited From an IRA

If you are the beneficiary of a Roth IRA, consider rolling the funds to an inherited IRA and postponing making withdrawals until the end of the 10-year time period. That way, you could allow the investments to grow then withdraw the earnings tax-free.

An inherited IRA can boost your finances, but new IRS rules may mean a tax headache. If you inherited a retirement account in the past several years, it's likely you'll have to take distributions and pay taxes on all that money within 10 years, according to new, finalized IRS rules.

What is the inheritance tax waiver in New Jersey? ›

An inheritance tax waiver in New Jersey is needed when a person inherits property from someone who has died and the value of the inheritance is above a certain threshold. The waiver acts as proof that the inheritance tax has been paid, or that it is not owed, and is required to transfer ownership of the property.

The tax was phased out over a period of years and is now nonexistent. This means that regardless of the size of the estate if someone dies their estate owes nothing to the state of New Jersey.

The executor, administrator, or heir-at-law of the estate must file an Inheritance Tax return (if required) within eight (8) months of the date of the decedent's death.

Traditional IRAs are not subject to inheritance tax when the decedent is under the age of 59 ½ at the time of death. Contributions to Roth IRAs are taxable even though the decedent is under the age...

For defined contribution plan participants, or IRA owners, who die after December 31, 2019, (with a delayed effective date for certain collectively bargained plans), the SECURE Act requires the entire balance of the participant's account be distributed within ten years.

Traditional IRA

Contributions to an IRA are subject to New Jersey Income Tax in the year they are made. When you make a withdrawal from an IRA, the amount you contributed is not taxable, since the contributions were already taxed.

Answer. There is no way to get your IRA out of your estate except by taking the assets out of the IRA, paying income tax, and giving the money away before you die. Your IRA is subject to estate tax when you die and your beneficiaries will have to pay income tax as the assets are distributed from the IRA.

Regardless of your age, you will need to file a Form 1040 and show the amount of the IRA withdrawal. Since you took the withdrawal before you reached age 59 1/2, unless you met one of the exceptions, you will need to pay an additional 10% tax on early distributions on your Form 1040.

The executor, administrator, or heir-at-law of the estate must file an Inheritance Tax return (if required) within eight (8) months of the date of the decedent's death.