Inherited IRAs and Net Unrealized Appreciation: Today’s Slott Report Mailbag

Thursday, August 01, 2024

By Andy Ives, CFP®, AIF®
IRA Analyst

QUESTION:

I inherited both a traditional and a Roth IRA from my significant other (non-spouse) who passed away in 2021. He had started taking required minimum distributions (RMDs). I am less than 10 years younger than he was. Question is: do I or do I not have to empty both accounts within 10 years of his death? No one is giving me an answer one way or another.

ANSWER:

There are a few moving parts here, so it is no surprise you can’t find a straight answer. Since you are “not more than 10 years younger” than the deceased account owner, you qualify as an eligible designated beneficiary (EDB) under the SECURE Act. As an EDB, the payout structure is based on the type of account. For the traditional IRA, you can take annual stretch RMDs based on your own single life expectancy. Use your age in 2022 to determine the original life expectancy factor, then subtract 1 each year thereafter. The 10-year rule does not apply.

For the inherited Roth IRA, you have a couple of options. As an EDB, you could choose the 10-year payout rule. There are no RMDs within the 10-year period on inherited Roth IRAs. Or, you could choose lifetime stretch RMD payments. These RMDs would be calculated the same way as on the traditional IRA.

QUESTION:

I have purchased your books and followed your articles over the past 25 years. Thank you for your knowledge. Next year I am required to take my first RMD as I will be age 73. I have been retired since 2019. I have never taken any distribution from my 401(k) and have appreciated company stock. I understand a net unrealized appreciation (NUA) transaction can count towards an RMD. My question: does both the cost basis and the NUA portion count toward the RMD? Or does just the cost basis count towards the RMD? I have received some conflicting answers to this question.

Sincerely,

Dom

ANSWER:

Dom,

Yes, you can leverage the NUA tax strategy in conjunction with an RMD distribution. It appears you may be eligible for NUA as you have hit the separation-from-service trigger and have not touched the 401(k). If you pursue an NUA distribution, only the cost basis will be taxed as ordinary income in the year of the distribution. However, the total NUA distribution (cost basis AND appreciation) will count toward your RMD.

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