Who Pays Tax When an Estate Is the Beneficiary of an IRA?

When an Individual Retirement Account (IRA) owner passes away, the funds must be distributed to a beneficiary. While many people name an individual, it is also possible to name one’s estate as the beneficiary. This choice creates a distinct set of tax consequences because the IRA assets are paid to the estate before being passed to heirs. The tax treatment of these accounts carries over when they are inherited, and when an estate is the beneficiary, it introduces a separate legal and taxable entity into the process.

Determining the Taxpayer

When an estate inherits an IRA, who pays the income tax depends on the actions of the estate’s executor. The estate itself is a distinct taxable entity and must obtain its own Employer Identification Number (EIN) for tax purposes. The tax liability for distributions from a traditional IRA can rest with either the estate or the ultimate heirs, determined by a concept known as Distributable Net Income (DNI).

If the executor withdraws funds from the inherited IRA and retains those funds within the estate’s accounts for the tax year, the estate is responsible for paying the income tax on that distribution. The distributed amount is considered income to the estate and is taxed according to the estate’s income tax rates.

Alternatively, the executor can distribute the income received from the IRA to the estate’s beneficiaries in the same tax year. When this happens, the estate can take an income distribution deduction, passing both the income and the tax liability to the beneficiaries. The beneficiaries then receive a Schedule K-1 and report this income on their personal tax returns, paying tax at their individual rates.

For example, if an estate withdraws $50,000 from an inherited IRA and immediately distributes that same $50,000 to the sole heir of the estate, the estate itself would likely pay no tax. The DNI of $50,000 is passed to the heir, who then becomes responsible for the income tax. If the estate had kept the money, it would have paid the tax at its own, likely higher, rate.

IRA Distribution Rules for an Estate

The timeline for withdrawing funds from an IRA inherited by an estate is governed by a specific set of rules. An estate is classified as a “non-designated beneficiary,” a term that triggers less flexible distribution options compared to an individual heir. The rules hinge on when the original IRA owner passed away relative to their Required Beginning Date (RBD), which is the date an individual must start taking Required Minimum Distributions (RMDs).

If the IRA owner died before their RBD, the estate is subject to the “5-Year Rule.” This rule mandates that the entire IRA balance must be withdrawn by the end of the fifth calendar year following the year of death. No annual distributions are required during this five-year window, but the account must be empty by the deadline.

If the owner died on or after their RBD, a different rule applies. In this scenario, the estate must take distributions over the deceased owner’s remaining single life expectancy, a method sometimes called the “ghost life expectancy” rule. This allows the distributions, and the associated tax payments, to be stretched out over a longer period, calculated using IRS life expectancy tables based on the owner’s age at death.

Calculating and Reporting the Tax

Withdrawals from a traditional IRA by an estate are considered “Income in Respect of a Decedent” (IRD). IRD is income that the deceased person was entitled to receive but had not yet received before dying. This income retains its character and is taxed as ordinary income to the recipient, whether that is the estate or the estate’s beneficiary.

The reporting process begins when the IRA custodian issues a Form 1099-R to the estate. This form details the gross distribution amount and is sent to the estate using its unique EIN. The executor of the estate uses the information from the Form 1099-R to report the IRA distribution as income on Form 1041, the U.S. Income Tax Return for Estates and Trusts.

If the estate retains the income, it calculates and pays the tax based on the highly compressed fiduciary tax brackets. For 2025, an estate’s income over just $15,650 could be subject to the top federal rate.

To pass the tax liability to the beneficiaries, the estate files Form 1041 and also prepares a Schedule K-1 for each beneficiary who received a distribution. The Schedule K-1 informs each beneficiary of the amount and character of the income they received from the estate. The beneficiaries then use the information on their Schedule K-1 to report the income on their personal Form 1040, where it is taxed at their individual marginal tax rates.

Special Considerations for Roth IRAs

The rules change considerably when an estate inherits a Roth IRA instead of a traditional IRA. Because contributions to a Roth IRA are made with after-tax dollars, qualified distributions are entirely tax-free to the recipient. This tax-free status passes to the estate and its beneficiaries, meaning no income tax is owed on the withdrawals.

For a distribution from an inherited Roth IRA to be considered “qualified,” and therefore tax-free, the original account must have been established for at least five years before the distribution is made. This five-year holding period begins on January 1 of the tax year for which the first contribution was made to any Roth IRA by the original owner. If this holding period is met, all withdrawals are tax-free to the estate or its beneficiaries.

Even though the distributions are not taxed, the estate must still follow a mandatory withdrawal timeline. For distribution purposes, Roth IRA owners are always treated as having died before their Required Beginning Date. As a result, an estate inheriting a Roth IRA must follow the 5-Year Rule, which requires the estate to liquidate the entire account by the end of the fifth calendar year after the owner’s death.