22 Jan Inheriting an IRA? Watch your taxes
Q. When someone inherits an IRA from someone that had been taking Required Minimum Distributions (RMD), does the new beneficiary owner retain the amount of the unrecovered contributions of the prior owner? Can the beneficiary owner use the deceased owner’s unrecovered contributions amount when calculating the taxable amount of a distribution?
A. We’re glad you’re asking because this isn’t a simple thing.
First, when a non-spouse individual is the beneficiary of an IRA, the beneficiary can make a direct rollover to another IRA only if the new IRA is in the name of the decedent for the benefit of the beneficiary, said Maureen Jasper, a certified public accountant with Wilkin & Guttenplan in East Brunswick.
This kind of IRA is referred to as an inherited IRA.
“If the decedent was making nondeductible contributions to the IRA during his or her lifetime, the beneficiary’s basis in the inherited IRA will be the same as the original deceased account owner’s basis,” Jasper said. “Just note that the basis in the inherited IRA cannot be combined with the basis in the beneficiary’s other IRAs or inherited IRAs.”
Jasper said the taxability of a distribution from an inherited IRA — for which nondeductible contributions were made — is calculated the same as it would to the decedent if he or she were alive.
A portion of the distribution is excluded from gross income using a prorated formula of the IRA nondeductible contributions divided by the value of the IRA, generally speaking, she said.
“There are specific rules relating to distributions from Inherited IRAs and each situation should be evaluated based on the fact and circumstances of the case, so be sure to consult your tax advisor,” she said.
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This post was first published in January 2018.NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.