Inherited TSP
I inherited (non-spouse beneficiary), a Thrift Savings Plan(TSP) account from Mom who died in 2021 before she took her 2021 RMD. I have set up an Inherited IRA & TSP is in the process of sending funds to it. In prior years, the RMD was listed on the 1040 under pensions (line 5a 2020) and not IRA distributions (line 4a 2020). TSP will send me the RMD via check before funding the rest of the Inherited IRA.
1. Will the RMD I received from TSP be considered an IRA distribution on my 1040 for 2021 or do I list under pensions?
2. If this will be an IRA distribution for me in 2021–I also inherited a traditional IRA from her which has a basis on her IRS 8606. I also have an 8606 for me and read I will need 2 forms 8606, keeping her basis separate from mine. So, would the TSP RMD distribution be included on her 8606 with her traditional RMD, my 8606 or considered a pension for 2021?
3. Would the TSP Inherited IRA balance, (if now considered an IRA), be added to the Inherited traditional IRA balance in entering the value of all traditional IRAs as of 12-31-21 on her 8606? Or, would the TSP Inherited IRA balance be classified as a traditional IRA going forward and be added to the value of my traditional accounts?
4. I intend to stretch the Inherited IRA from TSP funds instead of using the new 10 year withdrawal rule, if this fact should complicate the above issue. I am planning to do a Roth conversion this year to use up my basis and no longer have an 8606 for me after 2021. Any thoughts appreciated!
Permalink Submitted by Alan - IRA critic on Tue, 2021-10-19 14:59
The TSP is distributing the year of death RMD to you as required before doing a direct rollover, therefore the 1099R will be issued by the TSP and you will report it on lines 5a and 5b of Form 1040.
That’s correct, you will need 2 separate 8606 forms identified as to whether they apply to your owned IRA or inherited IRA. This might become a support issue for some less sophisticated tax programs. The TSP RMD does not involve an 8606 or an IRA. It would be directly reported on Form 1040 as indicated above. Of course, you will also receive from the TSP a 1099R for the direct rollover of the TSP balance (after the RMD was distributed). You will also have to report this on lines 5a and 5b and enter “rollover” next to 5b. Your 5b taxable amount will only show the RMD. Has her 2021 IRA RMD been completed?
Since your inherited IRAs are both from Mom, they will be subject to one combined 8606 showing the inherited IRA basis on line 2 for the year in which you take your first distribution from either. There is no need to take a 2021 distribution unless Mom did not complete her IRA RMD for 2021.
As you know, because the Secure Act does not apply to inherited govt plans like the TSP, you can still stretch the inherited IRA from the TSP, whereas the other inherited IRA will be subject to the 10 year rule. As such you cannot combine these inherited accounts into one, despite the fact that they are combined with respect to the inherited IRA 8606 you must maintain. Therefore, any distribution you take, whether RMD or not will require an 8606 showing the balance of both accounts, with the taxable amount pro rated. With respect to your own Roth conversion, that is beneficial to the extent that you do not convert so much that your current marginal rate increases beyond what you marginal rate would otherwise be in the future. Adding to the complications of this plan, you may have heard that a pending tax bill in Congress will do away with the ability to convert IRA basis starting in 2022. Therefore, the higher your own IRA basis % is, the more likely a conversion will be beneficial this year, since it might be the last year any conversion you do will not be 100% taxable. And based on Congress’s tendency to pass these types of bill in late December, you may well not have time to act after the bill passes amid the usual year end holiday rush aggravated by thousands of taxpayers rushing to do their last pro rated conversion of basis. One way to address this is to convert now the amount you would convert anyway regardless of what happens, leaving the rest in limbo while you monitor this bill’s progress. Of course, if your IRA basis is less than 5%, it probably does not matter that much. But I don’t think that avoiding an 8606 for your own IRA should be weighted too highly compared to the tax rates you will pay for the conversion if your TIRA balance is substantial.
Permalink Submitted by Patricia Giroux on Tue, 2021-10-19 17:27
Thank you for the very thorough answer! Just to confirm my understanding, neither her TSP nor IRA RMDs were taken in 2021. With the TSP RMD on 1040 line 5a & b, that leaves only her IRA RMD for line 4a. But, for the 8606 for 2021, should I only include the value of the inherited IRA and not the Inherited TSP for this year only? I know you advised both account values and distributions would be reported for 2022 and on. These distributions would include RMDs from the stretch and also distributions under the 10 year w/d for the IRA. I was just confused on 2021 since the TSP RMD is reported under pension for this year. So the Inherited TSP will be treated just as an IRA for 2022 onward (not pension), reporting all RMDs on 1040 line 4a along with the inherited IRA withdrawals and including its value & distribution amounts on the 8606 too, correct? Also, thank you for pointing out a possible tax software issue for generating two different 8606’s.
Permalink Submitted by Alan - IRA critic on Tue, 2021-10-19 19:08
To backtrack somewhat, if she took ANY IRA distributions in 2021, on her final return an 8606 will be needed and the line 6 value of her IRAs on the 8606 should show the value on her DOD rather than year end. An attempt would have to be made to determine that value as close as possible, but the exact value may not be attainable and perhaps an estimate would have to be made. The amount of basis applied on that 8606 would determine how much basis you inherited. Of course, it’s simpler if she took no 2021 IRA distributions.
For YOUR inherited IRAs 8606, you would show the year end value of all your inherited IRAs from Mom. The fully pre tax TSP will therefore dilute your inherited IRA basis to a lower % of your inherited IRA. Since what you will have at year end will be two inherited IRAs and no TSP, you must include the total value as your inherited IRAs on your 8606.
So if you do not file her final return or if no return is due because her gross income was below the filing limit, your inherited IRA basis inherited from her IRA would have to be determined if she took a distribution whether a return is filed for her or not.
Re your last question, the two inherited IRA must be treated as IRAs and any distribution YOU took including completion of her 2021 IRA RMD will be reported on lines 4a and 4b with the 8606 determining the 4b taxable amount. And if you do your own Roth conversion this year, the result from your own separate 8606 reporting the conversion will also end up on lines 4a and 4b. The only entry you will need on line 5 is from the 1099R from the TSP for her 2021 RMD that was distributed to you as beneficiary. All other IRA activity will be on line 4.
Permalink Submitted by Patricia Giroux on Tue, 2021-10-19 19:43
Thank you does not seem enough to say for all the excellent info you’ve shared with me. Who knew how complicated inheriting an IRA could be! I do follow what you’d shared and appreciate your comments. You definitely do a great service to those of us trying to follow the rules but needing to interpret them first!
Permalink Submitted by John Quidt on Fri, 2021-11-05 12:57
Supposing the initial poster co-mingled the TSP funds and her mom’s IRA funds into a single Inherited IRA instead of creating two separate inherited IRAs. I’m assuming there is no way to unwind that, correct? Assuming this cannot be unwould, would combined TSP/IRA funds just be treated as subject to the 10 year SECURE act provisions?
Permalink Submitted by Alan - IRA critic on Fri, 2021-11-05 16:02
The IRS has not indicated what the consequences are if inherited IRAs subject to different RMD schedules are combined, but it is generally assumed that the shortest LE would apply to the account. However, when a 5 or 10 year rule inherited IRA is combined with a LE inherited IRA (rollover from TSP), the shortest LE would probably consist of starting with annual LE RMDs for the entire balance of the combined inherited IRA, but in year 10 the balance would have to be distributed. This would entail the most restrictive combination of the formerly separate RMD schedules. Again, there is no specific guidance on the consequences of a disallowed combination, for example if the error is discovered there is no IRS guidance that would allow the combined account to be re partitioned to separate inherited IRAs in the same proportion they existed when improperly combined. The historical IRA lack of inherited IRA enforcement and lack of custodian reporting of RMD amounts has contributed to the lack of guidance for some of these situations.
IRS Reg 1.408-8 QA 9 does state that inherited IRA RMDs can be aggregated when inherited from the same decedent, if LE or 5 year rule applies to both, but not when LE applies to one but not the other. Such disallowed aggregation would allow the inherited account with the shortest distribution schedule to be used for all RMDs, thus preserving the balance of the longer distributed inherited IRA, thus extending the overall stretch. So there is this related guidance, but still no specific indication of the consequences of a disallowed combination.
Permalink Submitted by David Mertz on Fri, 2021-11-05 20:42
“However, when a 5 or 10 year rule inherited IRA is combined with a LE inherited IRA (rollover from TSP), the shortest LE would probably consist of starting with annual LE RMDs for the entire balance of the combined inherited IRA, but in year 10 the balance would have to be distributed.”
I would agree with that. This would produce distributions that are certainly larger than the amount that would have been required had the accounts been kept separate, so there would be no justification for the IRS to assess any penalty for excess accumulation.