2023 taxes - inherited ira question

[bobbyr]

Hello,

My mom passed away in late 2022 and I took a good sized distribution from her IRA that I inerited (I think I took 15%, since I'm not on SS yet).

As I am looking at my 2023 tax calculations, I am wondering about exactly what is taxed on this money. I withheld 10% of the distribtion, but I get confused about the cost basis on her investments that were in this IRA. Since they were in her IRA, they didn't get stepped up on her death, do I pay taxes on the stock sale with the old basis or am I just paying taxes on the distribution, independent of any gains on the stocks?

Thanks in advance. I am just doing some preliminary calculations prior to getting our paperwork to our CPA...just thought I'd ask on this forum.

 

[njhowie]

You shouldn't have anything to be concerned with. If traditional IRA, then everything is taxable when it comes out. Cost basis is irrelevant being that none of the money that went in was taxed, so again, all of it will be taxable when it comes out. If Roth IRA, everything was taxed on the way in and everything is tax free when it comes out.

Any purchases/sales of securities within the Inherited IRA do not create taxable events. It is still an IRA, and any taxes are only on withdrawn amounts if Traditional.

Keep in mind that you have 10 years from Dec 31, 2022 to completely empty the Inherited IRA. At this time, RMDs are not required. However, IRS keeps saying that it is coming, so keep an eye out for that because not withdrawing enough when RMDs are required will result in a 50% penalty on the difference of the RMD amount and what you did withdraw.

 

[PaunchyPirate]

No need to track the basis. As mentioned above, unless it is a Roth, you pay taxes on whatever is distributed to you each year. How much taxes you pay will be based on your overall income for the year. So the 10% withholding may or may not be enough to cover the taxes. The IRA distribution is treated as regular income -- added to your other regular income.

 

[CRLLS]

As mentioned, it the account was a trad IRA, then every penny gets taxed when withdrawn. As for RMDs, the rules are very complex. They are different if you were a named beneficiary, or the IRA was distributed via the estate. It also makes a difference if DM was already making RMDs or not. The IRS also stayed the RMD requirements for a few years. I suggest you find the info on your particular situation in the IRS website rather than take advice from SGOTI.

 

[MissMolly]

You shouldn't have anything to be concerned with. If traditional IRA, then everything is taxable when it comes out. Cost basis is irrelevant being that none of the money that went in was taxed, so again, all of it will be taxable when it comes out. If Roth IRA, everything was taxed on the way in and everything is tax free when it comes out.

Any purchases/sales of securities within the Inherited IRA do not create taxable events. It is still an IRA, and any taxes are only on withdrawn amounts if Traditional.

Keep in mind that you have 10 years from Dec 31, 2022 to completely empty the Inherited IRA. At this time, RMDs are not required. However, IRS keeps saying that it is coming, so keep an eye out for that because not withdrawing enough when RMDs are required will result in a 50% penalty on the difference of the RMD amount and what you did withdraw.

The penalty is no longer 50%. The SECURE 2.0 Act drops the excise tax rate to 25%; possibly 10% if the RMD is timely corrected within two years.

 

[bobbyr]

thanks all for the good feedback.

 

[njhowie]

The penalty is no longer 50%. The SECURE 2.0 Act drops the excise tax rate to 25%; possibly 10% if the RMD is timely corrected within two years.

Nice!

For me and sis, I've decided to not have to worry about it and we're taking enough each year that it is guaranteed to be at/above RMD amounts and empty it in year 10.

 

[GrayHare]

You do get a step up, but it's not a good one. All the cap gains, dividends, etc, earned inside a tIRA upon withdrawal get a step up to the tax rate for ordinary income.

 

[RetireBy90]

As mentioned, it the account was a trad IRA, then every penny gets taxed when withdrawn. As for RMDs, the rules are very complex. They are different if you were a named beneficiary, or the IRA was distributed via the estate. It also makes a difference if DM was already making RMDs or not. The IRS also stayed the RMD requirements for a few years. I suggest you find the info on your particular situation in the IRS website rather than take advice from SGOTI.

What if the contributions or some were after tax, don’t you need to take that into account, if OP knows and has access to records ?

 

[bobbyr]

What if the contributions or some were after tax, don’t you need to take that into account, if OP knows and has access to records ?

it was a very old traditional IRA that didn't have any post tax contributions or any contributions beyond dividends reinvested since before 1990 probably - all individual, dividend paying stocks.

I took out 15% last February and it already made that back (which is very cool)