Inherited IRA tax question
Last year, my two brothers and I inherited an IRA which was held at institution #1. Institution #1 divided the original IRA into three accounts, one for each of us. They sent each of us our share, which we then in turn deposited into our own Inherited IRAs at our preferred institutions.
When my brothers got their money, they each received two checks: one for the bulk of the IRA made out to institution #2, and one for $3000 made out to them as a tax-free return of contribution. They kept the second check, and sent the first one along to institution #2. No problems.
However, institution #1 made a mistake with my money. Instead of sending me two checks, they sent [b]one[/b] check which included the $3000 return of contribution. The paperwork that accompanied the check did show the breakout of the two amounts, but it was all in one check. I had no choice but to deposit the entire amount with institution #2.
Now that I have started RMDs, how do I avoid paying taxes on the $3000 that should’ve been returned to me? I expect to withdraw far more than $3000 both this year and in subsequent years.
Permalink Submitted by Jose Morales on Fri, 2011-01-21 01:01
Any funds distributed from the deceased’s IRA to any of the beneficiaries which was not transferred to a beneficiary IRA is reportable/taxable. I’m not sure what is meant by a “tax free return of contribution.” They should have received, or will receive in the next two weeks, a 1099R for these $3,000 distributions which they will have to report on their 2010 tax return. If $3,000 had to be distributed to each of the 3 beneficiaries in order to satisfy the original IRA owners 2010 RMD, then you are $3,000 short from fulfilling this requirement.
Permalink Submitted by Alan Spross on Fri, 2011-01-21 02:30
Are you sure you inherited an IRA rather than an employer plan such as a 401k?
Only an employer plan retains accounting records for amounts of after tax (or non deductible) contributions, and separating the amounts for distribution purposes would not be proper without a prior request by the beneficiaries since all amounts can be tranferred to an inherited IRA account regardless of pre or post tax status.
In your case, you have simply transferred the after tax amount to an inherited IRA which means you have basis in that inherited IRA. You need to file an 8606 showing the 3,000 amount of basis on line 2, and your RMDs will be based on the total balance and each RMD or other distribution will contain a pro rated tax free amount.
It appears that the others asked to have the after tax amount separated and perhaps you did not. But first we need to clarify that you inherited an employer plan and NOT an IRA.
Permalink Submitted by Tom Todaro on Fri, 2011-01-21 11:20
My apologies — it was a 401K that I inherited, not an IRA.
Permalink Submitted by Alan Spross on Fri, 2011-01-21 16:58
OK, then your after tax contributions have been rolled to the inherited IRA, and you must file the 8606 in the year you first take a distribution to report the 3,000 additional basis. That will eliminate double taxation. On that same 8606 the taxable amount of your distributions will be calculated on a pro rated basis. This basis is NOT combined with any IRAs for which you are the owner rather than beneficiary.