Post tax portion of Inherited IRA

[Bogie]

I inherited an IRA from Dad in 2017. I had assumed that all of it was pretax contributions so since then I have been getting RMDs and filling out TurboTax and when asked by TurboTax, I have indicated that all contributions were pretax. I was going through old records and ran across forma from the late 1990's that his accountant filed that shows there was a fairly large part that is actually a post tax contribution. The accountant didn't file the form to document the post tax portion after the late 1990's so when I took over his estate and looked at his tax forms from the early 2010's I didn't know he had made post tax contributions. Ok, so the question is, when I do my taxes for 2023 and beyond can I just fill in the TurboTax for the inherited IRA with what I NOW know is a portion of it as being post tax and pay tax on the taxable portion that TurboTax calculates? I've always been taxed as if it was all pretax contributions.

 

[Bogie]

Replying to my own post:

I recalled that he did a roth conversion on some of his IRA while he was still alive so that probably complicates the question.

 

[2017ish]

Probably not the technically immaculate way to proceed, but that's what I'd do. In the end, the basis you didn't invoke in the prior years will accrue to your benefit in the future tax years; more or less a wash. Filing amended returns would be painful and not worth it for me--unless a major impact on your taxes.

As for the Roth conversion--do you have the form 8606 filed for that, which shows the latest basis values at that time?

 

[SecondCor521]

You should find the latest Form 8606 of his tax returns to get the correct numbers to use for the after tax basis. After tax contributions and Roth conversions are both handled on Form 8606, so you can use the latest one and properly handle both aspects.

Yes, you can start using the numbers from his latest 8606 to reduce the amount of your distributions from the inherited IRA which is subject to tax, which in turn should reduce your tax bill.

You can either start doing that now, starting with your 2023 tax return. Or, you can go back and amend all open years (so back to 2020 or 2021 or so) to effectively start doing it a few years ago. The latter should result in additional refunds for 2020/2021/2022, but is more hassle on your part. I'd probably estimate how much of a refund would be involved by taking the after tax basis in the IRA for each open year and multiply that by my marginal rate that year, then sum those results across all open years. Then decide if it's worth the hassle. (ETA: based on @2017ish's post above, it would be mostly a wash because the basis would either be used in those older years or in the next few years. The only difference would be if you were in higher tax brackets in the past few years, but that effect would probably be minimal.)

It sounds like you inherited the IRA in its entirety. However, if the IRA was inherited by multiple entities (perhaps siblings?), then you would have to allocate the after tax basis among those entities/siblings in proportion to the percentage of the IRA they inherited.

 

[Bogie]

Probably not the technically immaculate way to proceed, but that's what I'd do. In the end, the basis you didn't invoke in the prior years will accrue to your benefit in the future tax years; more or less a wash. Filing amended returns would be painful and not worth it for me--unless a major impact on your taxes.

As for the Roth conversion--do you have the form 8606 filed for that, which shows the latest basis values at that time?

't





The Roth conversion was done by Dad in 2017 before he passed but when I did his return for that year I did not know there was a post tax basis since the last 8606 that his accountant filed was in the late 1990's and I didn't know there had ever been one filed. I just happened to find those very old returns from almost 30 years before I started filing his returns for him.


So, I filed a 8606 for 2017 for Dad when his roth conversion was done but I did not know there was a post tax basis since it had been over 20 years since the accountant filed a 8606 with a basis. He had the same accountant until about 2012 but the accountant wasn't filing 8606. I assume they were supposed to every year but they didn't.



Thanks so much for the reply.

 

[SecondCor521]

So, I filed a 8606 for 2017 for Dad when his roth conversion was done but I did not know there was a post tax basis since it had been over 20 years since the accountant filed a 8606 with a basis. He had the same accountant until about 2012 but the accountant wasn't filing 8606. I assume they were supposed to every year but they didn't.

You only are supposed to file a Form 8606 if there is some sort of activity that requires it - a nondeductible traditional IRA contribution, or a Roth conversion, or an early Roth withdrawal. In intervening years, you don't file it.

If you file an 8606, then have intervening years where it isn't filed, then file another 8606, the proper thing to do is carry forward the information from the last 8606 filed.

So in your case, when you filed the 8606 in 2017, you should have carried forward the information from your Dad's most recently filed 8606 from 20 years before.

Since it sounds like you didn't, if you're going to start claiming that after tax basis now on your inherited IRA, step one would be to go back and correct the 2017 8606. That 2017 Roth conversion should have used up some of the after tax basis then, leaving you less to use now.