Inherited IRA Distribution NIIT

[bnsmit0]

Hello, I've tried to find a clear answer on this one but I keep getting conflicting responses. An IRA was inherited by a non-spouse and not subject to RMD. I know distributions themselves are federal and state taxable and the amount counts towards MAGI for NIIT purposes. However my question is, distributions are taken is  NIIT owed assuming it's over the income threshold?

[baldietax]

Like wages, the distribution could trigger the tax if it pushes MAGI above the threshold, but is not included as investment income to be taxed itself.  See Form 8960 (see https://www.irs.gov/instructions/i8960) for the calculation, for individuals the tax is applied to the lesser of your "investment income" (interest, dividends, cap gains etc), or the excess of your MAGI above the threshold i.e. you are being taxed on your investment income (not the distribution itself) but only to the extent your MAGI exceeds the threshold e.g. if your MAGI is 225k vs. threshold 200k, of which 100k is "investment income" then 25k will be taxed.

[dmertz]

For the purpose of NIIT, distributions from IRAs are not treated as investment income. 

26 U.S. Code §1411(c)(5) Exception for distributions from qualified plans
The term “net investment income” shall not include any distribution from a plan or arrangement described in section 401(a), 403(a), 403(b), 408, 408A, or 457(b).

[bnsmit0]

Thank you both for the input, that is what I was reading, but sometimes the AI generated answers disagree 🙂

I was also curious if it was still considered an "IRA" or a "retirement account" since it was inherited. I wasn't sure if it somehow changed status into something more like a simple investment account since it was inherited.

[Opus 17]

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@bnsmit0 wrote:

Thank you both for the input, that is what I was reading, but sometimes the AI generated answers disagree 🙂

I was also curious if it was still considered an "IRA" or a "retirement account" since it was inherited. I wasn't sure if it somehow changed status into something more like a simple investment account since it was inherited.

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It is an "inherited IRA" which is a sub-type of IRA with additional rules.

[dmertz]

An inherited IRA is still an IRA, either a traditional IRA under section 408 or a Roth IRA under section 408A.