You will be receiving form 1099-R and it needs to be reported as such; please be sure to enter the form information into Turbo Tax exactly as it appears and answer the follow up questions. The tax treatment of the inherited IRA depends on whether it was inherited from a spouse or a non-spouse.
1. Federal Taxes
2. Wages and Income
3. Select Jump to Full list
4. Scroll down to Retirement Plans and Social Security
5. Select IRA, 401(k), Pension Plans (1099-R)
NOTE:
The tax
treatment of an inherited IRA depends on whether it was inherited from a
spouse or a non-spouse.
1. Inherited from a spouse.
If you
inherited a traditional IRA from your spouse, there are three choices:
1. You
can treat it as your Own IRA by designating yourself as the account owner.
2. Treat
is as your own by rolling it over into your IRA, or to the extent it is taxable
to a qualified employer plan.
3. Treat
yourself as a beneficiary rather than treating the IRA as your own.
You will
be considered to have chosen to treat the IRA as your own if you made
contributions to the inherited IRA (your above the line deduction) or you
do not take the RMD -required minimum distribution for a year as a beneficiary
of the IRA.
2. Inherited from a non-spouse.
If you
inherited the IRA form a non-spouse, you cannot treat it as your own. It
means you cannot make any contribution, you cannot rollover any amounts into or
out of the IRA, other than trustee-to-trustee transfer as long as the IRA into
which amounts are being moved is set up and maintained in the name of the
deceased IRA owner for the benefit of you as beneficiary. You also must
begin receiving distributions from the IRA under the rules for distributions
that apply to beneficiaries.
If you
received a distribution from an inherited IRA, it is added to
your income and taxed accordingly. You will be receiving a Form 1099-R
indicating your distribution as a “death distribution” – code 4 in box 7 will
be applied.
Please
enter this form in the Wages and Income section, as you will be asked
additional questions about the decedent. For example, if the decedent made
any nondeductible contributions. Why is this important? Well, nondeductible
contributions are treated as return of investment and are not taxable; it may
be beneficial for you to find out (often your plan administrator, broker or
banker has this information or form 8606 from prior years' tax return should
indicate that information ). You will also be asked if the original owner
of the IRA passed away after he/she was 70 ½, did he/she take required Minimum
Distribution (RMD) in the year of death. Again, your plan administrator should
know and you should as well…if the RMD was not taken, a 50% penalty on not
distributed amount may be applied.
