Inherited IRA

[Dan]

Question: An IRA is inherited from a sister and transferred to another IRA in another company. The person receiving the IRA did not receive a check and transfer it but had the IRA transferred from one company to another company. My question is: Can the person that inherited the IRA take Short-term losses and Long-term losses on the IRA? The IRA account was transferred on 10/16/09.

[mcb39]

Wouldn't the losses belong to the deceased sister? His basis is the basis on the day that he inherited it.

[joanmcq]

No, the basis is not the basis on the day inherited. The basis is whatever the sister's basis was. Usually there is no basis. And an inherited IRA has to be rolled into a beneficiary IRA; it can't be rolled into his own.

[Dan]

Wouldn't the losses belong to the deceased sister? His basis is the basis on the day that he inherited it.

Are you saying the value of the IRA is the day he inherited it? Therefore he can't take any short-term and long-term losses on Schedule D.

[joanmcq]

No, he can't take losses on Sch D. IRA withdrawals are ordinary income. C'mon people, this is basic stuff!!

[BulldogTom]

Does the IRA have basis? The only way to know is to pull the deceased's returns and look for 8606's for non-deductible contributions.

The taxpayer who inherited the IRA cannot roll the IRA into their own IRA account. They can only make a rollover to an account in the name of the decedent. They are required to take the Minimum Required Distributions.

When taking distributions from the Inherited IRA, if the IRA had basis, the taxable amount of the distribution is calculated using the rules for annuities.

There are no gains or losses attributable to an inherited IRA.

Tom

Lodi, CA

[kcjenkins]

Tom has it just right. Only basis would be if some of the contributions were non-deductible, which will mean looking at sister's old returns to determine.

[BulldogTom]

Just to add another point, if the beneficiary does not start taking the RMD's based on the annuity table, they must take all the money out of the IRA within 5 years. Depending on the value of the IRA, it could cause a tax problem in the 5th year if they do nothing. Assume the IRA has a million bucks in it and the beneficiary just lets it sit. In year 5 they will have a million to add to thier 1040.

Another comment on the post. The IRA company should have known that they cannot roll an inherited IRA into the beneficiary's name. If they did this, it should be corrected. Most IRA managers are familiar with this rule and would not make the mistate. Double check. I am assuming that Dan has not gotten the full story from the client and needs to inteview him a little more and make sure what is done. If they did in fact roll the IRA to his name, he has a distribution of the entire amount and a non qualified contribution to an IRA that must be removed from his IRA.

What we don't know is the age of the sister, the age of the brother, or the balance of the IRA.

I can assume (very dangerous) that after the transfer the IRA lost value and that is what the taxpayer is trying to capture. That will not fly.

Tom

Lodi, CA

[Dan]

Does the IRA have basis? The only way to know is to pull the deceased's returns and look for 8606's for non-deductible contributions.

The taxpayer who inherited the IRA cannot roll the IRA into their own IRA account. They can only make a rollover to an account in the name of the decedent. They are required to take the Minimum Required Distributions.

When taking distributions from the Inherited IRA, if the IRA had basis, the taxable amount of the distribution is calculated using the rules for annuities.

There are no gains or losses attributable to an inherited IRA.

Tom

Lodi, CA

Tom, what if both names are on the account--The sister who passed away and the sister who inherited the IRA? Can the company who has the account transfer it to the company of the living sister's choice?

[BulldogTom]

I am not sure how the IRA can have both sister's names on the account. I don't think you can title an IRA that way. Even spouses cannot put both names on an Individual Retirement Account.

My guess is (and I am just guessing so be careful) that the IRA custodian has properly moved the IRA and it now says something like "Sister 1, decedent, for the benefit of Sister 2". This will indicate that it is an inherited IRA to the IRS.

The beneficiary can move the IRA to a company of her choosing (like from Fidelity to T. Rowe Price). She just can't lose the identity as an inherited IRA. She can trade within the IRA, moving the funds or stocks that are held in the IRA as she pleases. It IS her money to do with as she pleases. She can withdraw the funds as she pleases as well. But she must take at least the minimum distribution based on the decedent's age using the annuity tables. If she misses the first payment, she has to withdraw all the funds from the IRA within 5 years.

The whole concept here is that the decedent has never paid tax on the accumulation of wealth in the IRA. When she died, the IRS wants to start getting their taxes that have been deferred. That is why they want the title to remain in the name of the decedent so the IRA funds don't get mixed in with the beneficiary's IRA. It is a tracing thing.

Hope this helps.

Tom

Lodi, CA

[TaxmannEA]

Are we clear that this is not a Roth IRA?

[kcjenkins]

NO IRA, ROTH or traditional, can have more than one name on it. Something is off here. I'm wondering if this is even an IRA at all. Sounds like it might have been just a saving account or CD that had two names on it. That you can do. IRA you can not have but one person on it. That I in the name stands for Individual. No joint IRAa, of any kind. You can have joint beneficiaries but not joint owners.