Establish an IRA for a deceased person
I have a client who passed in Jan 2012. We are taking some of his 401K as NUA and we are trying to keep the deceased spouse’s income in the 15% tax brackett in order to avoid any LTCG tax on the NUA which is around $230,000 so that she would not have to pay any tax on the sale of that stock as the tax would be 0 % if we can keep her in the 15% tax bracket. We can only take advantage of that opportunity this year because she can file as married and filing jointly this year and next year as single. Thus, in order to avoid paying any income tax on the 230,000, I am looking for all the deductible amounts we can use. So the question is can one set up an IRA for a deceased person. I’m pretty sure the answer is not but want to eliminate any questions about this possibility. Thank you in advance for your help..
Permalink Submitted by Alan Spross on Tue, 2012-03-20 17:39
A regular IRA contribution cannot be made for a decedent, however a spousal contribution could be made for the surviving spouse (who will not reach 70.5 in 2012) using earned income of the decedent prior to death.
Decedent’s cost basis on the NUA shares will be taxable and that will eat up some of the space before the top of the 15% bracket as well as the 0 taxed NUA, and additional LT gains above that will be at the 15% rate. That will probably leave much of the NUA to be taxed after 2012 at undetermined rates. Perhaps then, paying 15% might be worth it especially if there is a need to diversify out of the company stock.
Permalink Submitted by James Garland on Tue, 2012-03-20 19:30
I thought that was the answer. I was looking to get every deduction possible but I think I can make up some of it by putting the max of 22,500 in her 401k then doing an IRA as well. Between those two items that should get us down to the $ 70,700 to get her into that 15% brackett. I was looking for something that we could do in 2013 for 2012 in case we got a surprise in some 1099s or W2s. Thank you for your help, Alan.
Permalink Submitted by Bruce Steiner on Tue, 2012-03-20 21:16
If you’re going to sell the NUA stock and incur capital gains tax, it’s a closer call than one might suspect as to whether it’s better to use NUA treatment or to do a rollover, give up NUA treatment, but get the income tax deferral of the IRA and the potential Roth conversion. Given the amount involved, it’s worth running some numbers.
Permalink Submitted by Alan Spross on Tue, 2012-03-20 22:47
[quote=”[email protected]“]I thought that was the answer. I was looking to get every deduction possible but I think I can make up some of it by putting the max of 22,500 in her 401k then doing an IRA as well. Between those two items that should get us down to the $ 70,700 to get her into that 15% brackett. I was looking for something that we could do in 2013 for 2012 in case we got a surprise in some 1099s or W2s. [/quote]
With respect to keeping options open, if the NUA shares are distributed in December, the taxpayer can still opt within 60 days to do a rollover or partial rollover of those shares to an IRA. You would not want to gamble that the LSD is not completed due to the holidays etc, so if the distribution was received by mid December, the 1099R by the end of January, there would still be a couple weeks in the 60 day window to complete the rollover if the 1099R presented a surprise, taxpayer changed strategy etc. Of course, with a firm quote for the cost basis dollars, the cost basis would not change before distribution but the amount of NUA would float up or down based on daily stock value changes.
But this does provide an extra 60 days to consider other options. Note that the situation presents considerable other variables if the taxpayer made after tax contributions to the plan, some of which were allocated to employer shares, but that should also be disclosed with a plan quote on the cost basis.