Ded/Non-Ded mix in an divided Inherited TIRA

Submitted by n2b on Mon, 2018-09-17 18:25

Appreciate your opinion on the following situation.

I have a Traditional IRA with a mix of deductible and non-deductible contributions. I am 86 years old and have been taking out the RMD as required these many years. When I file my annual taxes I proportion out the tax due by using the IRS Form 8606. So far all is well.

I have designated my two daughters as equal beneficiaries for each to inherit 50% of the IRA and have signed the designated beneficiary form with the custodian. I have also left instructions with the children for each of them to create a separate inherited IRA account rather than an own account so that they can stretch the IRA and withdraw the lower RMD based on their individual ages.

My question is how would the beneficiaries proportion out the taxes on their half of the stretch RMD based on the ratio of deductible versus non-deductible contributions when each files her IRS Form 8606

Thanks for your help

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Permalink Submitted by Alan - IRA critic on Tue, 2018-09-18 00:07

The simple answer is that each daughter will inherit 50% of your remaining basis since they are each 50% beneficiaries. However, the more complex part of this is getting the total amount of basis that is inherited correct. The form 8606 you file each year uses the total of your distributions plus the year end value of all your non Roth IRAs to determine the amount of basis recovered (used) in that year and your remaining basis shows up on line 14 of the form. But in the year of your death, line 7 of the 8606 should indicate the value of your IRAs on your date of death, not at year end. Therefore, they will not know exactly the amount of basis they inherited until your final return and 8606 is completed. The line 14 on that form will show the total amount of basis remaining and each of them will inherit 50%. They would then file their own 8606 with each inherited IRA distribution, and on the first one enter their starting basis on line 2 of each of their 8606 forms. The % of each of their distributions that is non taxable will be very close to the % that will be on your final 8606 with investment gain or loss in the IRA having an impact of that %.
Although tax software updates the 8606 every year, changing tax programs or preparers makes this tougher. If the amount of basis they inherit is small, they could just ignore it and avoid an 8606 even though their taxable income would rise somewhat as a result. If one daughter wishes to ignore their inherited basis, the other daughter cannot use that basis on their own 8606.