Inherited IRA Distribution and Tax Liability Question
Is an inherited IRA distribution counted as income in the calculation of the modified AGI to contribute to a traditional IRA?
I have a potential client who took out $150k of a non-spouse inherited IRA. I don’t think they realized all the tax implications of that action. Now, they are wanting to limit their tax liability. Somebody mentioned to me that an inherited IRA distribution isn’t counted as income when trying to calculate if a person can deduct contributions to a traditional IRA. I was hoping somebody may be able to clear this up for me.
Also, once a non-spouse receives a distribution from an inherited IRA, they can’t put the money back in there, correct?
Thanks,
Chad
Permalink Submitted by Alan Spross on Tue, 2008-10-28 03:54
Chad,
You are correct. Once a non spouse takes a distribution from an inherited IRA the decision is irrevocable because the distribution is not eligible for rollover. The only possible relief is that he might have inherited some tax basis in the IRA if the decedent had made any non deductible contributions or rolled over any after tax employer plan balances. Have decedent’s prior returns checked for Form 8606.
On your basic question, these IRA distributions must still count in determining the modified AGI with respect to making a regular IRA contribution. Your source may either have been thinking about RMDs not counting toward the 100,000 income limit for Roth conversions, but that is only the RMD and only for conversions.
However, they may also have been referring to the fact that IRA distributions do not result in the taxpayer being considered covered by a retirement plan at work. If this client is not covered at any time this year by a retirement plan at work, depending also on his marital status and spouse’s coverage at work, he might still be able to make a full deductible contribution to a TIRA. But that is only 5 or 6,000 and would not cover much of a 150,000 distribution.