Benificiary IRA- Buy/Sell Securities
Hi, I have moved forward rolling over my mother’s 401k into an inherited IRA. I had a couple of questions to understand how this works in 2021. I know that the stretch IRA has not been compressed to a 10 year required distribution period. But does the BIRA behave similarly to Roth IRAs when buying and selling securities?. Basically is this action tax silo’d (I can buy and sell securities without any tax liability at all). Of course I would pay the taxes when I take distributions.
Also now that I have transferred those assets to that account, are there any special measures I need to take that people often overlook? Any common mistakes? I just don’t want to miss anything that would incur a tax penalty or fee. Thank you for your help.
Permalink Submitted by Alan - IRA critic on Thu, 2021-08-05 15:47
First, if your mother was taking RMDs and did not complete her 401k RMD for 2021, you must complete that RMD before doing a direct rollover of the rest. You can either liquidate the 401k to cash or roll over the securities in kind as long as they are not proprietary funds for your 401k that the IRA could not accept. Any buying or selling within either account are not taxable or reportable transactions, only distributions out of the account that are not rolled over are taxable and you will get a 1099R for distributions. Your direct rollover (as long as you did not roll to an inherited Roth IRA) is reportable (1099R to be issued), but not taxable.
Too late now, but some inherited 401k accounts include highly appreciated employer shares or employer share units that could be utilized for NUA, with the gains on those shares taxed at the lower LTCG rate when you eventually sell them. But these shares cannot be rolled to an IRA without extinguishing the NUA option. While you probably did not inherit such shares that had high enough appreciation, you may not have considered this before doing the direct rollover.
The IRA that these funds are now in should include only accounts inherited from mother because you should not combine inherited IRA unless they are subject to the same RMD calculation. For example, you cannot combine this with another inherited IRA from your father who passed earlier since the RMDs would be different. Assuming that mom passed in 2021, you only distribution requirement is that the inherited IRA must be drained by 12/31/2031. You have no annual RMDs until 2031, but if the account is not real small, you might want to take distributions to spread out the tax liability each year instead of waiting until 2031.
The largest pitfall for all non spouse inherited retirement accounts is that you cannot do a 60 day rollover. You can transfer accounts directly if you wish (to another IRA custodian), but any distribution you receive will be taxable with no recourse.
Permalink Submitted by Alon David on Thu, 2021-08-05 16:06
Ok great this makes sense. Thank you. Just double checking my knowledge about this and making sure there isn’t any small fine details that would incur a penalty with the IRS because my negligence and ignorance on this topic. But of course I will consult my local tax advisor. I appreciate your help.
Permalink Submitted by Alon David on Sun, 2021-08-08 18:36
Does cost basis matter when in an Beneficiary IRA? If I choose to take my distribution in shares (firstly is that possible?) and is there an advantage to do that rather than transfer the distribution in cash to the individual brokerage account?Does it matter to keep the same cost basis or does cost basis not apply to such an account?Also does the distribution have to be to an individual brokerage account or can it go straight to another IRA?
Permalink Submitted by William Tuttle on Sun, 2021-08-08 20:51
There is no basis inside of a tax-advantaged account. Distributions from pre-tax accounts are subject to ordinary income taxes.
Some custodians do allow in-kind distributions, but often only to a brokerage account at the same institution. In this case the cost basis will be the far market value (FMV) on the date of distribution. If you were not spending the distribution, this is easier than taking a cash distribution and rebuying shares.
Distributions from a non-spouse inherited retirement account are irrevocable and can not be rolled over
While a spouse can rollover an inherited retirement account distribution.
RMDs are never rollover eligible.
Permalink Submitted by Alan - IRA critic on Sun, 2021-08-08 23:48
It is possible to have inherited after tax dollars in your mother’s 401k. This is not the same as cost basis which attached to individual securities, it is overall basis that might have existed in her 401k plan that you inherited before doing a direct rollover to the inherited IRA. How would you know if that was the case? You would need a closing account statement from her 401k at the time of the direct rollover showing any after tax contribution balance in the plan. The 1099R you receive for the direct rollover will not indicate the existence or lack of existence of any after tax basis in the plan. While your chances of inheriting such basis are probably less than 10%, it is worth checking into, particularly if the rollover balance was large. If you find that such basis esists and was rolled into the inherited IRA, you should file a Form 8606 for the inherited IRA reporting such basis on line 2 of the 8606 for the first year in which you take a distribution from the inherited IRA and include an explanatory statement why. Your inherited IRA distributions would then be pro rated in applying your basis.