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Same as Decedent
When you inherit an IRA, your basis in the account is the same as the decedent’s basis. For traditional IRAs, that’s the amount of any nondeductible contributions made to the account. For Roth IRAs, the basis equals the amount of total contributions, because all Roth IRA contributions are nondeductible. For example, if the decedent had a $20,000 basis in his traditional IRA because over the years he made $20,000 of nondeductible contributions to the account, your basis is $20,000.
Significance of Basis
The basis of an inherited IRA is significant because it often determines whether you will pay taxes on all or a portion of your distributions from the account. Knowing the basis in the account allows you to avoid paying taxes on money that has already been taxed. If the decedent made nondeductible contributions to a traditional IRA, the decedent has already paid taxes on that money. If you are unaware of the decedent’s basis in the IRA, you’ll pay taxes on all of the distributions from the account, including the money that was already taxed.
Taxability of Traditional Distributions
If the decedent had a basis in a traditional IRA from making nondeductible contributions, you have to figure the tax-free portion each time you take a distribution. Divide the basis of the IRA by the value of the IRA at the time you take the distribution to figure the tax-free percentage. Then multiply the percentage by the amount of the distribution. Finally, subtract the tax-free portion from the old basis to find the remaining basis. For example, say you inherit a traditional IRA with a basis of $20,000 and you take a $10,000 distribution when it is worth $100,000. The tax-free portion of the distribution equals 20 percent, or $2,000. Your remaining basis in the account is $18,000.
Once you know the decedent’s basis, it is helpful to discuss your options and requirements with a tax advisor to insure you understand the tax implications.
Inherited IRA Options
1. If you inherit a retirement account from your spouse, you can transfer the assets into a retirement account of your own. Rules about when and how you can take the money (distribution rules) are the same as if the account had always been yours.
2. Typically you transfer the money to an Inherited IRA, if you inherit from someone other than a spouse, but spouses can also open an Inherited IRA. The money in an Inherited IRA can continue to grow tax deferred, and you can generally start withdrawing it immediately without paying a penalty. You’re required to withdraw specified amounts (known as Required Minimum Distributions, or RMDs).
3. You can choose to take all the money now. The money from the inherited account may be taxable income depending on the type of IRA and whether the contributions were pre-tax or post-tax. Taking a taxable distribution all at once may push you into a higher tax bracket. If you choose to take all the money now, an Inherited IRA will be opened in your name to ensure that tax information is correctly reported to the IRS, and then you can choose to take the money in a single lump sum.
4. If you prefer to allow the assets to pass to alternate beneficiaries—perhaps to avoid tax implications—you can choose to “disclaim” the account. To do so, you need to act within nine months of the original owner’s death and before you’ve taken possession of the assets. Make sure you speak with your tax advisor to determine if this or one of the other options may be right for you.
Important to Know
Who inherited the account?
What type of account was inherited?
What is the age of the deceased? (determines required minimum distributions)
What was the decedent’s basis in the account? (after tax contributions, life to date, for the entire account history)
Once you have this information, it is helpful to discuss your options and requirements with a tax advisor to insure you understand the tax implications and have prepared for your required minimum distributions to avoid tax penalties.
All Americans who bought health insurance policies this year – not just those enrolled in Obamacare – face a 41 percent increase in excise taxes because of hidden fees contained in an obscure section of the Affordable Care Act, according to an investigation by The Daily Caller News Foundation.
Virtually everyone who pays for health care insurance this year will be affected by the tax. The little-known tax was imposed on all consumers regardless of whether they obtained their insurance through Obamacare or through their employer or as individuals in the private market.
This year the tax will cost individuals more than $500 in extra premiums according to one actuarial estimate. Families who purchased insurance will see their premiums go up by more than $700.
The new tax also hits senior citizens who rely on Medicare Part D and Medicare Advantage. It will land on the nation’s poor who depend upon Medicaid-managed care programs.
The 41 percent sticker shock increase doesn’t stop in 2015, however. Over the next four years, the statutorily mandated Obamacare fees are expected to double again.