Tax implications for non-citizen vs citizen family members receiving non-spousal inheritance from IRAs

The inheritance rules for IRAs depend more on the relationship to the deceased than citizenship status. Your father and sister can indeed open inherited IRAs as long as they're U.S. tax residents with valid SSNs or ITINs, which they should have as green card holders. For non-spouse beneficiaries of someone who passed away in 2022, the 10-year rule applies - meaning all funds must be withdrawn by the end of the 10th year following the year of death. There's no annual RMD requirement during those 10 years, but everything must be out by the deadline. This applies to both citizens and non-citizens who are U.S. tax residents. However, there's an exception for your father since he's over 72 - he would need to take annual Required Minimum Distributions (RMDs) based on his life expectancy, plus empty the account within 10 years. For your mortgage question - using inherited IRA money to pay off debt doesn't change the tax implications of the distribution itself. The distribution is considered ordinary income. If you roll it to an inherited IRA first, you'll pay taxes as you withdraw. If you take a lump sum now, you'll pay taxes on the entire amount this year.

I went through something similar last year with my aunt's IRA inheritance. Super confusing at first! I ended up using https://taxr.ai to analyze all the distribution documents and inheritance options. Their AI analyzed my specific situation and helped me understand all the tax implications for non-spousal IRA inheritances. The site explained that even though the executor is cutting checks, you might still have a 60-day rollover window to get those funds into an inherited IRA, but you need to act FAST. There are specific rules about indirect rollovers vs. direct transfers that their system clarified for me. Might be worth checking out since you've got the added citizenship complexity.

Just wanted to update - I took the advice and tried https://taxr.ai for my parents' situation. Really glad I did! The system analyzed their green card status and determined they could indeed open inherited IRAs, but also flagged something I hadn't considered: my mom might qualify for a special exception that would allow her to stretch distributions over her lifetime instead of the 10-year rule because she's over 72. It generated a complete report explaining exactly what forms they need and deadlines for establishing the inherited accounts. The service even provided language to use with the financial institution handling the transfer. Definitely worth checking out if you're dealing with inheritance tax questions!

After reading your post, I immediately thought about how difficult it is to get clear answers from the IRS on these complex inheritance situations. I spent WEEKS trying to get through to someone at the IRS last year for a similar inherited IRA question with my non-citizen spouse. I eventually used https://claimyr.com to get past the endless IRS phone queue. They have this system where they call the IRS for you and then connect you once they reach a human. You can see how it works at https://youtu.be/_kiP6q8DX5c - I was really surprised it actually worked. The IRS agent confirmed that permanent residents follow the same inherited IRA rules as citizens, but there might be some additional reporting requirements depending on whether they maintain financial ties to their home country.

I need to apologize and eat my words about Claimyr. After my skeptical comment, I decided to try it anyway because I've been trying to get clarification about my mom's required minimum distributions from an inherited IRA for MONTHS. It actually worked perfectly. They had me on the phone with an IRS representative in under 45 minutes (after I'd spent literally hours trying on my own over several days). The rep confirmed exactly what my mom (a green card holder) needs to do with her inherited IRA and sent me the relevant documentation. The agent even helped me understand how the 10-year rule intersects with annual RMDs for someone over the age requirement. Huge weight off my shoulders. I'm genuinely shocked at how well this worked.

One thing nobody's mentioned yet - if the IRA funds were already distributed to the estate and then the executor is cutting checks to beneficiaries, you might have already lost the option to roll over to inherited IRAs. Typically, to maintain the IRA tax-advantaged status, distributions should go directly to the beneficiaries or to inherited IRAs set up for the beneficiaries. The fact that checks are coming from the estate rather than directly from the IRA custodian is concerning. You might be looking at fully taxable distributions for everyone involved.

For your situation in California specifically - keep in mind that California taxes retirement account distributions as ordinary income just like the federal government. So if you take a lump sum, you'll pay both federal and CA state taxes on it. If your HELOC interest rate is lower than the potential growth rate in an inherited IRA, you might want to consider keeping some money invested and stretching distributions over the 10-year period. The market has historically returned more than typical mortgage rates.

The advice about estate distributions potentially losing IRA status is crucial - this is actually a common mistake executors make. If the IRA funds were distributed to the estate first, you're likely looking at fully taxable distributions for everyone. However, there's still hope! Some IRA custodians will work with you to establish inherited IRAs even after an estate distribution, especially if you can document that the intent was always to preserve the tax-advantaged status for beneficiaries. The key is acting quickly. For your non-citizen family members, once you get this sorted out, they'll follow the same rules as citizens regarding inherited IRAs. Your father will need annual RMDs plus the 10-year rule, while your sisters just need to empty their accounts within 10 years. Given your San Diego location and that 7.5% HELOC rate, paying off the debt might indeed be the smart move - especially with current market volatility. Just make sure to factor in the combined federal and California tax hit when calculating your net savings. I'd strongly recommend having the executor contact the IRA custodian immediately to see if this can be corrected before any individual distributions are made.