Can I opt out of income taxes on inherited retirement benefits?
July 22, 2008 11:01 PM Subscribe
Can I opt out of paying income taxes on inherited retirement benefits in the USA? I won't be filing a tax return, anyway.
posted by xanthippe to law & government (9 answers total)
I am a beneficiary of my deceased mother's state retirement plan. I have been given the option to either roll the amount over into an IRA (which I don't want) or take a direct payment, which appears to be subject to a 30% tax: 20% is automatic, and the other 10% appears to be related to electing not to put the money into an IRA.
If I choose a direct payment, the forms give me the following options:
A) "10% federal income tax withholding from any taxable portion of the accumulated account"; or
B) "no federal income tax withholding from any taxable portion of the accumulated acount"; option B continues, "If you request no withholding, you may still be responsible for payment of federal income tax on the taxable portion of your distribution. You may also be subject to tax penalties if your total estimated tax payments and withholding are not adequate to cover your tax liability."
Firstly, could someone please clarify the meaning of option B? I assume it means opting out of an automatic tax payment and agreeing to voluntarily pay it on my next federal income tax. However, I have been living outside of the USA and not filing tax returns for several years, and I intend to continue doing so. I am specifically confused about the ramifications of the last sentence considering, as far as the IRS is concerned, I will not have any income this year.
My real question is therefore: What, if any, consequences will I face if I simply take the maximum amount in cash and do not later declare it as income? If there is a penalty for this, is it subject to a statue of limitations? In other words, is this an easy way out or a really bad idea? I intend to remain invisible to the IRS for the forseeable future; will this ruin my plan?
Lastly, given that I am unlikely to ever live or retire in the USA, is there any other reason, specifically relating to taxes or avoiding such, that I should choose the IRA rollover option instead of a direct payment?
Thanks for any advise. I know I should see a financial advisor/accountant but I currently have major logistical obstacles in this regard.