question about an inherited IRA

[redstatebluegirl]

My husband inherited part of his Mom's IRA, around $12000. He took the lump sum and now we are doing our taxes. After putting the documents from the company in our turbotax software I found we owed almost $3800. I was surprised. We got 6000 from her checking account as well, we were told by the lawyer we did not need to declare it as income. Why does the IRA fall into the income category, it isn't ours we inherited it?

Sorry, we may need an accountant this year. By the time we are finished there won't be any money left.

[Phoenix61]

1. Taxes were never paid on that money

IRA deposits are made pretax. When the money comes out, taxes have to be paid.

[lastlib]

11. (unless it's a Roth)

[cilla4progress]

2. State

Or federal taxes?

[Xipe Totec]

3. You do need an accountant

However, the biggest difference between the IRA and the checking account is that the money in the IRA never paid any taxes; these were deferred, so Uncle Sam want's the taxes that are still owed on that money. The checking account is money that already paid taxes before being deposited. Likewise, a Roth IRA would have paid taxes ahead so the money in the Roth account would also not owe any taxes.

[redstatebluegirl]

4. Thanks I get it.

Just was a bit of surprise since most of her money was in her IRA retirement fund. She didn't live long enough this past year to take any out of it. She passed in February.

[zipplewrath]

5. Roll it over

You might be able to roll it over into another IRA to avoid the taxes for now. Some day they want to get paid. I rolled one over from my mother, but because of her age, and mine, I had to take force withdrawls over a three year period.

[redstatebluegirl]

6. CAn we still do that?

I am 62 my husband is 52, his mother was 71.

[zipplewrath]

15. Yes, but

you might be too late. Ask a tax accountant or a financial adviser.

[question everything]

12. Don't you need 60 days to roll it over?

Agree with others here, though. Talk to a CPA.

[PJMcK]

7. I was an executor for an estate

Each circumstance has its own peculiarities. General advice cannot address specific issues.

I hired an experienced accountant and I suggest you do the same.

Good luck!

ETA: It's well worth the money to have professional counsel.

[progree]

8. I inherited an IRA -- it is vital that it be done right to avoid it all being taxed

within the first year, or in the first 5 years.

It has to be retitled just so, and be transferred from institution to institution (or account to account) to a properly titled IRA beneficiary account (or words close to that).

If you just cashed it in, then, well, taxes are due on the entire amount (unless its a Roth IRA).

Someone mentioned a 60 day rollover period where you can take possession (cash it out, stick it in a regular account of yours, whatever) and then put it in the right place - an IRA beneficiary account. So if you are within the 60 day period from when you transferred it to a regular account of yours or whatever or cashed it out or whatever, you MIGHT be able to put it in a proper IRA beneficiary account. I'm not sure that the 60 day period applies to inherited IRAs.

https://www.irahelp.com/phpBB forum is full of experts on this kind of stuff.

In my case, I had help from my parent's estate planners, and Fidelity had a great explanation guide book too (the IRA account was at Fidelity). From the beginning, even though I was well below age 70.5 (and still am), I have to annually take a Required Minimum Distribution according to a table. But that's a lot better than getting taxed on it all in one year! And the benefits of tax-deferred compounding are big.

This was more than 10 years ago, and the RMD's are still quite small. (The percentage amount one must withdraw each year grows each year).

Good luck!

[Cicada]

9. Be sure to enter the box 7 code correctly and enter the tax withheld

The distribution is not subject to the early distribution penalty. You will have to pay income tax on it but not that penalty.

[redstatebluegirl]

10. Thanks we had tax taken out before we took the disbursement.

I think we are screwed, but it was not money that was ours to begin with so it is what it is.

[SCantiGOP]

13. You're not screwed

Taxes were still due on the money regardless of who owned the account. You are going to have a portion of it taken for the federal tax that was never paid and then you get to keep the rest.
Any tax-deferred asset, such as an IRA or 401-k, has to have taxes paid as it is drawn down.

[question everything]

14. If tax was taken then you may not need to pay more

Do use a CPA. No, not the one provided by TurboTax but a real one. Get there before the rush beings.

Good luck!

[A HERETIC I AM]

16. ALRIGHT, ALRIGHT, ALRIGHT!! Lets get a couple things straight!

#1) There is no 60 day period in which you can deposit these funds back into an inherited IRA account if you have already taken the distribution in full. There is also no such thing as a "rollover" in this case, because you can not continue to contribute to an inherited IRA. The IRS does not allow such things for this situation. So, if your hubbster has the cash already, it is considered that he has taken possession and the IRS looks at this in the same way as if he had gotten a $12,000 raise. He (you both) owe taxes on it at your top marginal rate. Just to be clear, the 60 day period applies when transferring an IRA and/or doing a rollover of a 401(k) (and a 403(b) for that matter). You can cash out a 401(k) and get a check, but as long as the funds are placed into another tax deferred account within 60 days, no 'material possession' has taken place. Typically one would simply do a rollover and never see a check. Again the above last two sentences do NOT APPLY to inherited IRA's

#2) Ideally, a separate "Inherited IRA" account is set up for each beneficiary that will receive the funds. The title name of the account can vary depending on custodian, but a typical one would read something like "John Smith IRA (deceased 11/27/09) F/B/O John Smith, Jr., Beneficiary” where "F/B/O" stands for "For the Benefit Of". If there was say...4 kids and the account was $100,000 to be split evenly then each new account gets $25,000, right? The IRS is very specific about what MUST happen to those funds once they settle into the new IRA's. Keep in mind there is no obligation to sell securities either. In other words, any stock, bond or Mutual Fund position or any other securities do NOT have to be sold unless, in the case of Mutual Funds, the custodian of the new accounts does not have a service agreement with the particular Mutual Fund company(s). Fidelity may not deal or have an agreement with Dodge and Cox or Oppenheimer, as a hypothetical example. Securities only need to be sold to satisfy the Required Minimum Distribution rules (RMD's)


#3) The way to handle it such that the taxes are spread out is to either a) take the RMD's required (As Progree indicates he is doing above) OR b) take distributions over a 5 year period. Either way, you owe taxes on the money.

RMD rules per the IRS;

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds

IRS pub 590-B

https://www.irs.gov/publications/p590b#en_US_2016_publink1000230542
Look at the section titled "What if you inherit an IRA - Inherited from someone other than a spouse"

Hope that clears a few things up.

[progree]

17. Thanks, looks right to me

I didn't know if the 60 day rollover exception applied to inherited IRAs or not, thanks for clearing that up (that it doesn't)

I did a quick Google anyway, and Google also say naw

https://www.google.com/search?q=60+day+rollover+on+inherited+ira

I have one minor quibble:

Securities only need to be sold to satisfy the Required Minimum Distribution rules (RMD's)

Not for regular IRAs, and I don't think for inherited IRA's either -- you can satisfy the IRA RMD by transferring the securities from the IRA to a regular taxable account -- known as an in-kind distribution.

[A HERETIC I AM]

18. You're correct, but with a caveat (edited)

You said;

Not for regular IRAs, and I don't think for inherited IRA's either -- you can satisfy the IRA RMD by transferring the securities from the IRA to a regular taxable account -- known as an in-kind distribution.

If you have a traditional IRA and turn 70 1/2 years old, you have to begin taking RMD's, right? Lets say you have a hundred grand in the account and all but $50 is in securities. Fifty in cash. If the first RMD is...say $125, you only need to liquidate a further $75 in order to satisfy that requirement. You don't have to liquidate all the positions at the beginning of the RMD process (go all to cash), nor do you have to move the money from the IRA to a non-tax qualified account and THEN take the money out. At least that is what I learned when I was a broker or if I am misunderstanding the IRS publications. (Here's the edit) You are correct however in that there is nothing stopping you from taking an RMD and placing the proceeds into a normal, vanilla, taxable investment account. In there you can invest any way you wish and be taxed on the gains only.

I had a client who passed away and had 4 kids. They all set up the inherited IRA accounts I mentioned above to receive their share. One kept the securities, transferred to the new, inherited IRA "in kind" as you said - a common practice and began the RMD process, selling off as needed to satisfy the dollar amount required. One liquidated the securities and just had the cash and took the RMD.s, one decided on the 5 year option and one bit the bullet on taxes and took it all at once to pay bills.

Also, as far as I know, there is no restriction on making trades in such an account, it's just that, as I said above, you can not add more money or contribute to this type of account. So if you don't like that Mom had shares of Apple for instance, and want to buy something else, to my knowledge, there is nothing that says you can't make a trade.