Inherited IRA w/after-tax monies
Mom died in 2005, instead of recharacterizing her IRAs to the trust account and doing a ‘stretch’, the majority of family voted to ‘cash out’ the IRAs.
Question 1: if the beneficiary was one of the brothers, he cashed the IRA, and this IRA was formed with ‘after-tax’ monies, does he still pay tax on top of this for cashing it in?
Qx 2: The IRA that lists the trust as beneficiary, if cashed out, is there a tax even though ‘after-tax’ monies were deposited into the IRA
She had formed 7 IRA accounts over the years and all were with ‘after-tax dollars”.. IF we don’t know if she filed any form 8606 with her 1040s each year, can we go back and file one for her without knowing how much was contributed each year.
Unfortunately all the IRAs have been cashed, and some money was held back by the CPA for taxes. IF there is a way to decrease this amount, please let me know.
kathy
Permalink Submitted by Alan Spross on Tue, 2010-01-05 00:56
There is no double taxation. If the IRA was funded by non deductible contributions, Form 8606 should have been filed each year to report them with the tax return. These non deductible contributions can date back as far as 1987. But if you can locate the latest 8606, it will show a cumulative amount of these contributions. If Mom had been taking RMDs or other distributions, there would also be an 8606 on these returns. Therefore, I would start looking at 2005 and move backward until you find the latest filing of this form. Upon her death, the IRA beneficiary inherits the remaining amount of basis and would then file their own 8606 with an explanatory statement showing the name and SSN of your Mother from who the basis was inherited. After the first year, the 8606 would be filed without the statement.
The CPA should be able to help with that if he was doing her tax returns. Of course, if a CPA was doing them, there is no excuse for not filing the 8606 since there would either be an 8606 or the contribution would be deductible.
If you discover that neither the deduction OR the 8606 applied, a taxpayer can file them retroactively starting with the oldest year. I am not sure if a beneficiary request to file these after the IRA owner’s death would present a problem, but probably not if the evidence is clear. The IRS knows how much was contributed each year via Form 5498, and they also have transcripts of older returns that can be ordered.
I caution against guessing on these figures either on the amount of contribution or their non deductible character. If a false claim for basis on any of these contributions is made, It is quite likely there would be a penalty and possibly reluctance to accept any of the retroactive forms.
If there were 7 IRA accounts, any basis would apply in proportion to the value of each at date of her death. That also is equitable if there is more than one beneficiary.
Finally, when were the IRAs cashed? You might be looking at a time limit to amend any returns here.
Permalink Submitted by Kathy Easter on Wed, 2010-01-06 09:47
Thanks for the info. The IRAs were cashed in 2007, 2008, and 2009. I will ask for the 8606 information. Can I go to the IRS for any of the documentation if I can’t find them in any of her paperwork? I have her social and information and I am listed as the second executor on her will and living trust?
My brother had kept 20% of the cashed funds to pay for possible taxes. I am second in line as executer and just want to get the estate totally closed out. That is the reason for the question. I am thinking that he did not need to set aside that much money. So, I am asking for a full accounting of the funds, the dates of cashing them in, and the amounts. There may not be anything afoul here, but, I just have a ‘gut’ feeling. There are 9 siblings and needless to say this whole thing has had a long drawn out discussion. I learned a lot about inherited IRAs and what ‘pitfalls’ to avoid when leaving them to heirs.
Permalink Submitted by mk foss on Mon, 2010-01-11 01:03
There is a procedure for requesting 1099s and 5498s for a taxpayer. There is also a procedure for requesting copies of prior tax returns. The IRS will generally send transcripts of returns and tax information documents for free but charges for the returns itself. Try going to http://www.irs.gov and searching for these procuedures.