Will an Inherited IRA (with no basis) impact my Form 8606 for my own IRAs?

[Anonymous]

Questions were confusing and when I selected that I inherited the IRA from my spouse and made it part of my IRA, Turbo tax did not automatically generate 8606 as it should have,  I think that still needs to be corrected. You need to select that it is not an inherited IRA to get the form. 

[KrisD15]

If you inherited the IRA from your spouse and elected to treat it as your own, it is no longer considered an Inherited account.

Please enter that IRA as your own going forward. 

"Spouses have more flexibility in how to handle an inherited IRA. For one, they can roll over the IRA, or a part of the IRA, into their own existing individual retirement accounts"

Inherited IRA by spouse

[VMOO]

I took a distribution from my non-spouse inherited IRA (with no basis) in 2021, and I have a traditional IRA (with a basis) with zero dollar contribution for the same year. After entering the inherited IRA 1099-R for the distribution, I was trying to see if I can contribute some funds to my own transitional IRA, and here arrives the confusion:
1> Do I need to file a Form 8606 to begin with? I didn't make a nondeductible contribution to or took a distribution from my own IRA nor did I covert part but not all to a Roth IRA.
2> Why my own IRA basis to be part of the inherited IRA distribution tax calculation? Why do they both appear on the same form 8606?
3> Why does the 2021 year-end value of my traditional IRA need to be entered in line 6 while the distribution is from the inherited IRA? Do I enter the value of the inherited IRA instead or do I need to add both of the inherited and the traditional IRAs values together?
I am not a tax expert but something doesn't seem right to me. Can anyone help? I don't want to file the return and got rejected.

Warm Regards,

[dmertz]

1.  If you made no nondeductible contribution for 2021, made no distribution from your your own traditional IRAs in 2021 and made no nonqualified distributions from a Roth IRA in 2021, your 2021 tax return will not include Form 8606.  Your last filed Form 8606 continues to show your current basis in nondeductible traditional IRA contributions.

2.  It's not.  Distributions for the inherited traditional IRA with no basis go nowhere on any Form 8606.  the taxable amount of the distribution from the inherited traditional IRA is the entire gross amount.  The year-end balance in the inherited traditional IRA is to be entered nowhere in TurboTax.

3.  See #1 and #2.  @VMOO , it seems that you may have failed to indicate to TurboTax that Form 1099-R from the inherited IRA is indeed an inherited IRA.  Even though this Form 1099-R has code 4, you must answer Yes on the page that asks if this IRA is inherited.

[SJGTX]

Great information, but I wanted to add that last year with 2020 taxes there was a known issue/glitch with reporting on Form 8606, and inherited IRAs were incorrectly showing up on Form 8606. In my case, Turbo Tax was erroneously using up part of my traditional IRA basis towards my inherited IRA distribution.  The issue was finally corrected last year,  but wanted to mention it in case this glitch is showing up again in 2021!

[VMOO]

@dmertz

You hit the nail on the head, that was very helpful. 

Thank you so much! 🙂

[jfvsenior]

Now it's 2023 and hopefully, the bug(s) discussed in 2021and 2022 posts have been fixed...

I was the designated beneficiary on my brother's 401(k) which was rolled over into an IRA-BDA  at Fidelity in 2022. The basis is zero.

Just to be clear, TT will not complete a separate 8606 for this account and will not combine this account with my non-inherited IRAs shown on previous 8606's.

and...

For the years I decide to take distributions under the 10 Year Rule, all I have to do is correctly answer the questions TT asks about the related 1099-Rs and TT will add the distributions to 1040-SR, Line 4a, without changing. Nothing else.

Correct? Thx.

[fanfare]

IRS has clarified that yearly RMDs are required on newly inherited IRAs under the 10-year rule if the decedent died after their required beginning date for RMDs.

IRS will enforce this rule with the 2023 tax year and beyond.

--

when you are subject to the 10-year liquidation rule for newly inherited IRAs,
to spread the tax impact most evenly over the ten years,
your divisor should be :   10 - N where N is the number of entire anniversary years gone by.

In other words, with four years gone by, you want to take out one sixth of the IRA in the fifth anniversary year.
If you are a young beneficiary, or even not so young, this rule would generate much larger RMD than the RMD based on Pub590B formulas.

[sandy4042]

Is this a recent IRA clarification?  I thought with the Secure Act, the beneficiary of a decedent's IRA (with certain exceptions, e.g., spouse, disabled person) had 10 years to empty out the IRA, in any annual amount they choose over 10 years.  If the decedent had already began their RMD, the beneficiary would be responsible for receiving the RMD (and paying taxes on it) in the year of death, if the decedent had not already taken it.  

I just checked the IRS website, and the verbiage is the same as earlier:

" For defined contribution plan participants, or Individual Retirement Account owners, who die after December 31, 2019, (with a delayed effective date for certain collectively bargained plans), the SECURE Act requires the entire balance of the participant’s account be distributed within ten years.  There is an exception for a surviving spouse, a child who has not reached the age of majority, a disabled or chronically ill person or a person not more than ten years younger than the employee or IRA account owner. The new 10-year rule applies regardless of whether the participant dies before, on, or after, the required beginning date, now age 72."

[sandy4042]

The question occurs to me (though thankfully hasn't happened in my particular case with an inherited IRA) what if a taxpayer has their own IRA and an inherited IRA, and they both have a basis?  That is, the amount of tax already paid needs to be subtracted proportionally when calculating the taxes on the distributions.  Do two separate Form 8606's need to be filed?  If yes, does TT generate both forms?

[fanfare]

@sandy4042 

yes.

and no, TurboTax does not support this situation.

[sandy4042]

@fanfare So in the above example, would the taxpayer not be able to e-file with TT, since they would need to do a paper Form 8606 for the inherited IRA that has a basis?  This is actually a situation that my children will face if they inherit since my spouse does have a basis in his IRA, which will not be used up until the final withdrawal.  

[fanfare]

I have a solution/workaround that involves TurboTax CD/download, but I'm not going to post it on this thread.

your husband is not dying I hope.

Maybe tax software will be smarter (AI or not) in the future when you need that.

@sandy4042 

[jfvsenior]

Thank you for the additional information. I'll bear that in mind.

Can you please answer my initial questions, now modified based on the information you provided...

Just to be clear, TT will not complete a separate 8606 for this account (Fidelity IRA-BDA, no basis) and will not combine this account with my non-inherited IRAs shown on previous 8606's.

and...

When I take a distributions under the 10 Year Rule, all I have to do is correctly answer the questions TT asks about the related 1099-R and TT will add the distribution to 1040-SR, Line 4a. Nothing else.

Correct? Thanks.

[sandy4042]

@fanfare, no, I won't need to do it, but I can foresee my children needing to do it, their problem I guess.  Probably they will need to go to tax professional.  But it reminds me to include somewhere in "notes to heirs" there's a tax basis in such-and-such an account.