Do losses on an Inherited IRA qualify as losses on a Traditional IRA?

Submitted by Patrick McCabe on Wed, 2018-03-21 23:49

Fidelity told me the IRA-BDA (Beneficiary Distribution Account) *is* a Traditional IRA. I began withdrawing the IRA-BDA funds in 2012, indeed, I have been living on them. They were exhausted in 2017. Sincere thanks if you can send me a link to an IRS or tax code website verifying that IRA-BDAs are considered Traditional IRAs. I’m aware of Mr. Slott’s admonitions from a March 2009 doc: 1) all the funds must be withdrawn from all the IRAs I own … 2) there was basis in the IRA-BDA … 3) a loss can be claimed only if there is basis and that basis is higher than the amount withdrawn. I’m also aware of Mr. Slott’s additional hurdles: 4) I can itemize … 5) the loss will be a Miscellaneous itemized deduction subject to the 2% of Adjusted Gross Income limitation … 6) my AGI has not & will not come anywhere near exceeding $159,950 (the 2008 standard – I hypothesize that number is still relatively relevant). I don’t know about Mr. Slott’s warning that “you can lose the deduction if you get hit with the alternative minimum tax”. My AGI since 2012 has been at poverty line levels. Thank you again for any help.



Submitted by Alan - IRA critic on Thu, 2018-03-22 02:28

  • An traditional IRA is addressed by code Sec 408. Sec 408(c)(ii) defines an inherited IRA as an IRA after the death of the account owner. The type of IRA does not change as you inherited a traditional IRA. If you had inherited a Roth IRA, then it would still be a Roth IRA, an inherited Roth IRA.
  • While the basis in your inherited TIRA is separated from the basis you may have in your owned TIRA if you own one, they are still both TIRAs. The IRS Pubs 590B and 529 do not clarify if you must close both your owned IRA and inherited IRA in order to qualify for a misc deduction. Do you also have an owned IRA? If so, I will try to research that further.
  • Your inherited TIRA distributions are being reported on Form 8606 if you have inherited basis. Your final distributions in 2017 would have to be tax free with basis remaining and that leftover basis would be your potential misc deduction subject to a 2% floor of your AGI and the rest of the requirements you listed above. Your AGI comes right off your 2017 tax return. 
  • I don’t know if this answers your question, but it may be a moot point if any of your distribution is taxable because that alone would mean that you did not close your inherited IRA for less than your remaining basis.

Submitted by David Mertz on Thu, 2018-03-22 13:05

Since basis in inherited and owned IRA accounts must remain separate (and also must remain separate between traditional and Roth), it would make no sense for the individual’s own IRAs to have to be drained to permit a deduction for unrecoverable basis in an inherited IRA.  Similarly, the IRS does not require traditional IRA accounts to be drained to be able to claim this deduction for unrecoverable Roth IRA basis or vice versa.  But IRS guidance does not seem to address the situation of unrecoverable inherited IRA basis explicilty.

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