Form 8606 and inherited IRA

Submitted by L. K. on Thu, 2010-03-25 13:55

My father died in July 2009. He was 73 and was already receiving RMD from his 403(b) and his IRA.

Later in 2009 his IRA was transfered into my mother’s name and his 403(b) was rolled over into an IRA in my mother’s name.
My mother was the sole beneficiary. RMD [b]was[/b] taken in 2009. The mutual fund companies asked, so my mom agreed.

Does a Form 8606 have to be completed for tax year 2009 for my father?
If so, the value on Line 6 would technically be $0 or should the value at date of death be placed there instead?

What is the correct way to do this?



Submitted by Alan Spross on Thu, 2010-03-25 18:32

I assume you are asking this because your father had unrecovered basis in his IRA at the time of his death and took a distribution. If so, the only date that works is the date of death value. But you won’t find this issue addressed in the 8606 Inst.

If the year end value of -0- was used, the line 10 result would be his basis divided only by his distributions prior to death. This would result in a much higher rate of basis recovery for 2009 thereby accelerating basis applied to your father and reducing the inherited basis for your mother. This situation is aggravated even more for non spouse beneficiary situations.

Since your Mom agreed to the RMD, is is possible that no distributions were made in 2009 under your father’s SSN as IRA owner. In that case, there is no 8606 required under his SSN, but your mother’s 8606 would be based on the year end value of all her IRAs including the assumed one. Her 8606 should be noted as inherited basis and added to any basis she might have had under her own IRAs previously.

You can therefore see that a different taxable percentage will result in distributions before his DOD vrs afterwards. I assume you are working on a final joint return here for 2009.

Submitted by L. K. on Fri, 2010-03-26 04:19

The 2009 distributions were under my father’s SSN.

Yes, my mom is working on the final joint tax return for 2009.

I found a similar case from 2008 asked on this message board, and the CPA apparently made Line 6 $0.
Frankly, the higher rate of basis recovery under this method means one less thing to keep track off.
Also, my mom starts receiving RMD this year.

Thank you for your answer.

Submitted by Alan Spross on Fri, 2010-03-26 05:10

Looking into this further in view of the 8606 Instructions, I am coming to the same result, but through line 7 rather than line 6. This is pretty detailed, so bear with me. First, the instuctions for Part I of Form 8606 are based on the portion of Sec 408 copied below:

>>>>>>>>>>>>>>>>>>>>>
408(d) Tax treatment of distributions
(1) In general
Except as otherwise provided in this subsection, any amount paid or distributed out of an individual retirement plan shall be included in gross income by the payee or distributee, as the case may be, in the manner provided under section 72.
(2) Special rules for applying section 72
For purposes of applying section 72 to any amount described in paragraph (1) –
(A) all individual retirement plans shall be treated as 1 contract,
(B) all distributions during any taxable year shall be treated as 1 distribution, and
(C) the value of the contract, income on the contract, and investment in the contract shall be computed as of the close of the calendar year in which the taxable year begins. For purposes of subparagraph (C), the value of the contract shall be increased by the amount of any distributions during the calendar year.
(3) Rollover contribution
An amount is described in this paragraph as a rollover contribution if it meets the requirements of subparagraphs (A) and (B).
(A) In general
Paragraph (1) does not apply to any amount paid or distributed out of an individual retirement account or individual retirement annuity to the individual for whose benefit the account or annuity is maintained if –
(i) the entire amount received (including money and any other property) is paid into an individual retirement account or individual retirement annuity (other than an endowment contract) for the benefit of such individual not later than the 60th day after the day on which he receives the payment or distribution; or
(ii) the entire amount received (including money and any other property) is paid into an eligible retirement plan for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received, except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross income (determined without regard to this paragraph). For purposes of clause (ii), the term “eligible retirement plan” means an eligible retirement plan described in clause (iii), (iv), (v), or (vi) of section 402(c)(8)(B).
(B) Limitation
This paragraph does not apply to any amount described in subparagraph (A)(i) received by an individual from an individual retirement account or individual retirement annuity if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in that subparagraph from an individual retirement account or an individual retirement annuity which was not includible in his gross income because of the application of this paragraph.
>>>>>>>>>>>>>>>>>>

Considering the above:
1) Line 6 should indeed be -0- since the account value at year end IS 0, BUT
2) Line 7 says to enter distributions but also says NOT to enter rollovers. However, you will note above that a rollover is defined as a payout to the individual for whose benefit the contract is maintained to another account for the benefit of that same individual. A so called rollover to a surviving spouse does not meet this definition because it is paid or the account is transferred to a different individual, ie the surviving spouse. Therefore, the rollover to the surviving spouse is NOT a rollover under this definition and is therefore a distribution to be reported on line 7 of the 8606.

Reporting the value of the account as of the ownership change results in adding in a figure that would be quite similar to the date of death value, but would not be the same. It is also different from what the year end value would have shown if the date of death value was shown on line 6. Nonetheless, most of the value would be there for purposes of determining the tax free portion of the 2009 distribution, RMD or otherwise. It would not result in a massive recovery of basis for your father at the expense of your mother’s inherited basis.

I understand that this is not the answer you wanted, and I am rather sure that all of this logic blows right past the IRS, but I think it explains why the 8606 is worded as it is. The Instructions should certainly have a clarifying item for line 7 since people do not live forever.

Finally, note on p 20 of Pub 590, a paragraph dealing with inheriting an IRA with basis that does not suggest that the basis is applied differently at death, but is inherited by the beneficiary.

Submitted by L. K. on Fri, 2010-03-26 14:10

Ah, Line 7. I understand.
I wonder whether doing this actually will confuse the people at the IRS more. 😕

additional edit:
If my mom filled out Form 8606 in the manner you suggest entering $0 in Line 6 and entering the value of the IRA at transfer, line 14 shows the value of the basis that she now inherits?

Submitted by Alan Spross on Fri, 2010-03-26 20:33

Yes, line 14 would be the basis that she inherits, and since she has assumed ownership of the IRA, that basis transfers to her own 8606 using her SSN.

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