Inherited IRA – Corrections
I understand that a non-spousal IRA has a 100% cost basis on the date bequeathed, that all subsequent earnings are taxable as ordinary income, that the RMDs include fractions of both basis and earnings, and that subsequent RMDs will have fractions that reflect a reduced basis. No distributions have been taken from any other IRAs. I find in Pub 590 paragraphs that addresses how to figure taxes using Worksheet 1-5 and Form 8606 for traditional IRAs that include nontaxable contributions, but not specifically for a non-spousal IRA (that was all taxable prior to death). Pages 38 – 41 appear to be not directly applicable to an IRA inherited by a non-spouse. Can you point me to any specific paragraphs that I should follow, or advise me in any way?
Permalink Submitted by Alan Spross on Sun, 2012-04-15 17:37
First, an inherited non spouse IRA may have it’s own basis which can be determined by locating the last 8606 filed by the decedent. This basis is not combined with any basis the beneficiary may have in his own IRA. If a beneficiary has inherited IRA basis and also owned IRA basis, he must file a separate 8606 for each IRA for report any distributions.
Forget Worksheet 1-5, as this does not apply in most cases and never with inherited IRAs because you cannot make a contribution to an inherited IRA. For a non spouse inherited IRA, just go directly to Form 8606, and enter the inherited basis on line 2 of the Form and then proceed with the rest of the form.
You indicated the inherited IRA was “all taxable prior to death”, and what you probably meant was that there is NO basis in that IRA because all decedent’s contributions were deducted. If that is the case, then you inherit no basis and would not use Form 8606 at all. Your distributions would be fully taxable.
And if you inherited an IRA with basis, this is addressed above and on p 17 of Pub 590, “IRA with Basis”.
Permalink Submitted by Bob Any on Tue, 2012-04-17 04:03
Alan, thank you for your post.
My hesitance is based on the fact that my situation does not comply with any of the criteria stated in F8606; I made no nondeductible contributions or conversions, ever.
Bob
Permalink Submitted by Alan Spross on Tue, 2012-04-17 04:34
Bob, I think you are incorrectly using the term “cost basis”. If you have 100% cost basis, it means the value of the IRA is equal to or less than your non deductible contributions. Therefore, if you never made non deductible contributions, you cost basis is 0%, not 100%.
In this situation, if the IRA owner (you?) never made non deductible contributions, Form 8606 was never used and will not be needed by the beneficiary of the IRA. Distributions will be 100% taxable.