Inherited IRA with cost basis AND personal IRA with cost basis

Submitted by ray perez on Sun, 2014-04-06 16:01

I have two Inherited IRAs (both from the same deceased non-spouse). I was a 50% beneficiary. They had cost bases and I have inherited my 50% of the 8606 cost bases.

I also have my own personal Traditional and Roth IRAs. I have cost basis in my Traditional IRAs which I have always tracked on my own 8606 form.

I am under age 59.5, and have never taken any distributions from my personal accounts. I do take the RMD from the inherited accounts and use the 8606 to determine my taxable amount.

In 2013 I converted some of my personal Trad. IRA to a ROTH, and received a 1099 form. This is the first distribution I’ve taken from my personal accounts.

The question is: neither TurboTax nor H&R Block software allow me to have two 8606 forms in the software. If I am correct, I cannot combine my 8606 info from Inherited and Personal on to one 8606. So, how do I manage this….I have paper 8606 forms where I fill in my info for my own tracking purposes, but the software won’t let me have two 8606 forms for electronic filing (or even for electronic tracking).

Do you have info on whether I can combine my 8606s in to one form, or how to have two 8606s in my filing? (software allows for Taxpayer and Spouse 8606s, I think, by mine is a Single return, not Joint, so there’s no spouse.

Lastly, Inherited Roth distribution (RMD) is not taxable to me at federal or state level, correct? (I assume since the original account owner paid taxes when contributions were made, that distributions would not be taxable to her, nor to me as Inheritor. Is that correct?

As for Traditional IRA distribution from Inherited accounts (RMD), after adjusting for cost basis, the rest is taxable to me federally. In Massachusetts we are taxed at contribution time, so we are allowed to take distributions tax free until we reach distribution levels equal to all contributions. My question is, for Inherited IRAs with cost basis (therefore contribution total is known) can distributions be taken tax free until reaching the level equal to contributions, even if I was not the one who made the contributions?

Thank you



Submitted by Alan - IRA critic on Sun, 2014-04-06 16:32

  • You cannot combine your own basis with inherited IRA basis, but this could be a software problem that has no solution. Nonetheless, if you have tried entering the separate basis amounts and the program will not accept the second one, try calling the help line to see if they know of a work around so you can still e file with one of these programs. There are probably few enough inherited IRAs with basis or the beneficiary has not overlooked the basis, that this combination has not been programmed.
  • Inherited Roth distributions are typically tax free, since using the ordering rules until 5 years has passed since original owner made the first contribution is enough time to reach the qualification year. If owner made the first Roth contribution prior to 2010, then the inherited Roth is qualified now. Once qualified, an 8606 is not needed to report distributions. The gross distribution goes only on line 15a of Form 1040.
  • I cannot answer the MA question for sure, but the answer would have to be Yes to avoid double taxation. Don’t know how you know the total contribution  amount other than from IRA owner’s tax records.

Submitted by ray perez on Sun, 2014-04-06 16:46

The software companies help lines are useless–I called.  They know of no workarounds.  Should I just mail my tax return and include two 8606s (Personal one printed out from the software and Inherited one handwritten, and write “INHERITED” at the top of the handwritten one)?Yes, the original Roth owner for my Inherited Roth made her first contributions prior to 2010, so that’s not an issue.But, this year I need to report some cost basis used up on the Inherited Traditional IRA so I’ll want to send an 8606 for that, and report some cost basis used on my Personal Traditional IRA to show the Roth Conversion I did in 2013.  Hence the need to file two 8606 forms.I read another posting/answer about someone made IRA contributions while living in NJ (and no state deduction for those contributions on the annual NJ state filing), but now that person lives in CA and is taking distributions. Answer seemed to indicate that the distributions are CA taxable, meaning that indeed there is double taxation.  So, it wouldn’t be out of line for MA to tax distributions made in another state by the original account owner, it seems.Surprisingly, I have all information from the original owner, so I know how much IRA contribution totals were. MA seems to have a rule where if the original contributions were made while living in MA, they are not taxed at distribution time until you reach the level of contributions.  But, for an inherited IRA (from a person living and contributing in another state)…that’s where the confusion lies.  Any additional thoughts would be appreciated. 

Submitted by Alan - IRA critic on Sun, 2014-04-06 17:39

Looks like your only choice then is to file manually to add the second 8606 marked “Inherited IRA AC#xxxx”. Every year that you do a conversion you would have to do this until the tax industry supports multiple 8606 forms for one person. With respect to moving to another state from where the non deductible state contributions were made, you could indeed have double taxation, but not if you stay in the same state. I thought that MA was the only state involved in your present situation. It was a huge tactical error for state legislators to ever deviate from federal law on IRA deductions, as it creates a lifetime hassle for taxpayers and these states were not able to come up with a solution that would be retroactively equitable.

Submitted by ray perez on Thu, 2014-04-10 01:10

Thank you, Alan.  Just to be sure I’m understanding your note properly, if an Inherited IRA with some cost basis is now being distributed to the beneficiary who lives in a different state (MA) than the original contributor lived in (NY), the beneficiary (inheritor) pays MA state tax on the entire distribution even though the original contributor had a cost basis?Am I correct that inherited Roth distributions are not taxed to the inheritor, no matter where they lived, because the original contributor paid tax in the years of contributions to both the Fed and the state that person lived in.  Or, is the inheritor getting distributions (in a different state than the original acct owner/contributor) tax free only on the Federal return, but not on their state (MA) return? 

Submitted by Ed on Mon, 2014-04-07 02:59

Here is a novel idea:why not use a professional, CPA

Submitted by Geore Ferenzi on Sat, 2014-04-12 20:48

Becasue their too cheap adn think they know the tax rules better. 

Submitted by William Tuttle on Sat, 2014-04-12 16:18

I believe Tax ACT will properly produce two 8606s, with one labeled INHERITED.That is if you can manage to answer the questions properly. If my memeory serves me it is very non-intuitive. 

Submitted by Alanna Crawford on Tue, 2014-04-15 17:55

Similar to some of the questions raised above, when an IRA owner converts a portion of a traditional IRA (with basis) to a Roth IRA, do they have to factor in any inherited IRAs to that calculation?  I would imagine not if there are supposed to be two separate 8606’s (one for the client’s own IRAs and one for their inherited IRA), but would like to know for sure as this could drastically change the taxability of the client’s conversion.

Submitted by Alan - IRA critic on Tue, 2014-04-15 18:58

Correct, the inherited IRA with or without basis of it’s own does not in anyway affect the the calculation of the taxable amount of conversion of the client’s own IRA. That said, if a surviving spouse inherited an IRA from the deceased spouse with basis and also have their own IRA with or without basis, the taxation of a conversion would be different if the surviving spouse rolled the inherited IRA over to their own before converting vrs converting the inherited IRA only. In this situation, the surviving spouse wanting to do a conversion would convert the IRA with the highest % of basis first before combining them in an owned IRA.

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