inherited IRA and cream in the coffee rule
Does the “cream in the coffee rule” apply to beneficiary IRAs?
In other words, if the father dies, and the daughter maintains his IRA as a beneficiary IRA (taking RMDs based on her life expectancy and stretching), does the basis in this IRA get counted if she does a Roth conversion of an after-tax contribution to a different traditional IRA?
Thanks!
Dave
Permalink Submitted by Alan Spross on Wed, 2011-03-09 22:47
A couple issues here.
1) She cannot convert an inherited non spouse TIRA to an inherited Roth IRA. Maybe in the future but not now under current law.
2) If she inherited basis from her father (See father’s final 8606), this basis is kept totally separate from any basis she might have in her owned IRAs. So she could convert her OWN IRA but the cream in the coffee rule would not apply between her inherited IRAs and her own IRA. It applies separately to each.
3) If her inherited IRA has basis, each RMD or other distribution she takes would be partially tax free per Form 8606. This 8606 would have to be identified as applying only to the inherited TIRA and if she also had a different basis in her own IRA and had activity in both, she would need a separate 8606 for each.
In summary, having the inherited TIRA would not in any way effect what she could do with her own IRAs and would not affect the tax bill for conversions of her own TIRA.
Permalink Submitted by David Briegs on Wed, 2011-03-09 23:54
Great. Was hoping so. Thanks!