Inherit IRA CD

Submitted by Stephen Swan on Fri, 2017-05-12 16:17

When my mother passed away at age 74, she had a IRA CD at a bank. I believe the funds for the CD came from the proceeds of her home several years earlier. The CD was split 50/50 between my sister and I and held at the bank as the IRA CD. The minimum required distribution for my portion was set as my age expectancy, as is allowed. Taxes were paid on the interest earned each year (now its been about 12 years). I can not get a clear answer on the following however: As the CD was started with cash, is a CD IRA, when a distribution (other than interest) is made, why do I pay taxes as earned income? If, for example, had this been a check account, and I with drew funds from time to time, I wouldn’t pay taxes on it. Right?

So, again, why do I pay taxes on the minimum required distribution?



Submitted by Alan - IRA critic on Fri, 2017-05-12 17:33

  • There should have been no taxes paid on CD interest because the CD is in an IRA. Taxes are only due if a distribution is taken from the IRA. Your mother had an RMD requirement starting in the year she reached 70.5. You and your sister are jointly responsible for completing your mother’s year of death RMD if she did not complete it before passing.
  • Now for your beneficiary RMDs. The first one is due by the end of the year following the year of your mother’s death based on your share of the IRA CD value on 12/31 of the year your mother passed. Taxes are due on this distribution because the CD balance had never been taxed unless your mother made non deductible IRA contributions and reported them on Form 8606. This is not likely.
  • If you inherited a checking or savings account, those accounts were not tax deferred and your taxable income would be limited to the interest paid after her death. For a tax deferred account like an IRA, no taxes were ever paid, and your mother should not have received a 1099R in the past unless she took distributions from the IRA including her RMDs. Perhaps your mother’s RMDs since age 70.5 is what you are referring to as interest. Her taxable income is due to taking distributions from the IRA, not to the fact that the IRA earned interest. In recent years CDs did not generate nearly enough interest to cover the RMDs that were due. So basically you will owe taxes on your beneficiary RMDs just as your mother owed taxes on her RMDs.
  • If this was a ROTH IRA CD, then no taxes would be due because Roth contributions are made after taxes were paid. If this is a Roth CD, it will indicate that in the title of the account.

Submitted by Stephen Swan on Fri, 2017-05-12 20:10

Let me apologize in advance. The reply to my question is why its so confusing. The reply inserts a bunch of info that is not relavent to the situation. I’l restate for clarity. My mother passed when she was 74 (thus assume distributions for tne CD IRA had taken place, by law). As the rules state, I assumed her age for distribution requirements, but my age for the minimum distribution. Taxes were paid on all interest earned: the interest was part of the distribution amount annually. Under what circumstance are taxes being required with normal distributions? Pu another way, if I had sold a house after owning it for 15 years and put the proceeds in a IRA CD with my bank, would I have to pay taxes on the normal distribution from that CD? If so, why? What if the funds that were used to establish the IRA CD were funds from a life insurance policy from whe my father passed? Would normal distributions be taxed? 

Submitted by Alan - IRA critic on Fri, 2017-05-12 23:46

If the contributions that were made to this IRA were all deducted, then all distributions from the IRA are taxable income. Annual contributions your mother made to the IRA were probably deducted, but contributions over the last 12 years were limited to around 3,500 to 6,500 per year and which must have come from earned income (wages or SE income). If a house was sold for say 150000, the proceeds cannot be contributed to an IRA because an asset sale is not earned income. Further, if she did have earned income from working, the contribution for any year would be limited to the above. Any additional contributions above the limit are excess contributions and subject to a 6% excise tax for each year they stayed in the IRA. Unless her last returns had Form 8606 attached showing that non deductible contributions were made, the IRA is 100% pre tax and every dollar that is distributed will be taxable. A review of her returns for the few years before her death should show that the IRA distributions were reported on Form 1099R and on line 15b of her 1040 as taxable income. If so, your RMDs would also be taxable. If IRA contributions are reported correctly and distributions are reported correct, income is only taxed one time.

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