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

[SJGTX]

To answer your question, the inherited IRA distribution should not appear on the 8606 form and it does not affect the totals of all your IRAs and thus affect the cost basis of other IRAs you might have. The distribution should be included in the totals of the distributions on the 1040 as you mentioned. Without having the form in front of me, I don’t know the exact line on the current form. Hopefully the glitches are fixed. I was affected by the inherited IRA glitch for 2020 taxes, but last year everything entered correctly and I didn’t have any issues. 

The other thing I wanted to mention in reference to some of the other replies, is that depending on when your Inherited IRA was established, you may not be subject to the 10-year withdrawal rule. It is my understanding if your IRA was set up before the law changed, your distributions are grandfathered so to speak and you don’t have to take withdrawals within 10 years. You should check further to see the timing of your IRA to see if it is subject to the new rule. 

[sandy4042]

@SJGTX I think it depends on the date of death of the person you inherited the IRA from (in general, not counting the allowable exclusions).  For example, my FiL died in 2014, was already taking RMDs from his IRA.  His beneficiary, my husband, continues taking RMDs, but based on a different IRS table, so at a different rate.  He set it up so that the custodian, Fidelity, calculates it and sends him the RMD annually.  The 10-year rule has no effect on this set-up.  In contrast, my mother died in 2021, after the designated Dec 31, 2019 SECURE act date of death) and the 10-year rule does apply.  She was taking yearly RMDs from her IRA, but I don't have to (except for the year of her death) as long as the account is zeroed out in 10 years.

[SJGTX]

Yes, exactly what I was trying to say.  Thanks Sandy! 

[sandy4042]

@jfvsenior I checked my 2021 TT joint tax return (1040-SR), and yes, all our inherited IRAs plus a Roth conversion (from my husband's IRA) were added together and placed in Line 4a IRA distributions.  TT took all the gross amounts from 1099-Rs (with the IRA box checked) and put it in Line 4a.   Due to a Roth conversion with a basis, we had Form 8606, Nondeductible IRAs, filled out but only for the Roth conversion, none of the inherited IRAs showed up.  I expect when husband starts his RMDs from his IRA , Form 8606 will need to be filed due to it having a basis.

[sandy4042]

@SJGTX Thanks.  I'm relieved whenever I get confirmed in my understanding about tax rules!

[fanfare]

"She was taking yearly RMDs from her IRA, but I don't have to (except for the year of her death) as long as the account is zeroed out in 10 years."

@sandy4042 

Don't be too relieved because you are wrong.

IRS has just 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.

--

still you must liquidate within 10 years.

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]

@fanfare, do you have a link to this IRS clarification.  When settling my mother's estate in late 2021, I talked to two separate institutional (PNC and TIAA_CREF) custodians of her IRAs and neither mentioned anything under review by the IRS concerning the SECURE act and the 10 year rule.  In fact, to inherit the IRA, I had to sign a statement that I was taking it under the 10 year rule, and no exclusions applied to me.  I have had no updates from either institution to date.

ETA  I see some mention about it in a few articles the past couple weeks.  Here's one from the Tri-City journal:

"The IRS has proposed that, because the SECURE Act did not specifically alter the annual distribution requirement, that it still remains. So, the IRS is contending (i.e. mandating) that the non-spouse beneficiary of an IRA take a fraction of the IRA for years 1-9 and take out anything remaining in year 10.

So, what’s the problem? Many people who have inherited an IRA since the SECURE Act was passed have assumed that no distributions were necessary and therefore chose not to take any distributions. And, until the recent passage of SECURE 2.0 in which the penalty will be decreased, the IRS imposed a penalty when a beneficiary failed to take a RMD of 50% on the amount not withdrawn.

Luckily, the IRS was sensitive to the outpouring of comments after it issued its proposed regulations when beneficiaries realized they might be subject to that 50% tax for failure to distribute the RMDs.

In Notice 2022-53, the IRS announced that its interpretation of the RMD rule would take effect (i.e. the final regulations will apply) no earlier than the 2023 distribution year. This means that those that failed to follow the IRS proposed regulations for 2021 and 2022 are in the clear.

But, for 2023, it’s time to be prepared to take the RMDs."

[dmertz]

@sandy4042 , the question is not whether or not you are subject to the 10-year rule, you are.  The question is whether or not you are subject to annual RMDs, which you are because the original IRA participant died after the required beginning date for RMDs.

It's a lot to wade through, but the proposed regulations are here:

https://www.federalregister.gov/documents/2021/09/15/2021-19713/annual-reporting-and-disclosure

[SJGTX]

There have been a lot of changes/clarifications to the original guidelines as several posters have been so helpful in pointing out. As you found out, even the professionals may have been unaware at the time you inherited your IRA as these clarifications came through much later. I found this Morningstar article helpful in clarifying some of this in terms we might better understand. Hope this helps.

https://www.morningstar.com/articles/1125762/who-does-and-doesnt-get-to-skip-rmds-under-the-new-10-y...

This article makes it sound like the beneficiaries still take RMDs based on their life expectancy (with new charts) but then have to take the remainder of the money out by the end of 10 years.  Fanfare’s suggestion is an option that would entail a more even distribution for RMDs so that you aren’t hit with a huge distribution at the end. At least that is my understanding.Obviously I am no expert on this as my inherited IRA was grandfathered so no 10-year rule applies. If anyone has different info on the 10-year rule as explained in the article, please assist.  

[sandy4042]

@SJGTX Yes, I'm glad I stumbled upon this thread because I was totally unaware of the RMD requirement, I had thought the 10 year rule replaced it in whole.  Apparently, this has been being discussed since Feb 2022 when the IRS did a proposal for clarifying, i.e. what the annual RMD should be in conjunction with the 10 year rule.  Due to much pushback for their lack of clarity before, they are offering a waiver of penalty for 2021 and 2022.  My understanding, so far, is you calculate the RMD for the beneficiary the same as you did before the SECURE act for years 1-9 and withdraw at least that amount.  Then in year 10, you take out whatever is left.  So there's some flexibility in years 1-9.  I'm going to call the IRA custodian and see what they know about this clarification since I know that pre-Secure Act, many people relied on them to automatically calculate and distribute their RMDs.

[sg14d]

@dmertz  @SJGTX  Thanks for the detailed guidance across this thread. Bumping this particular post in the hope that you are still monitoring:

In the event of a spousal inherited IRA *with* basis in non-deductible contributions, I understand that:

1. As it is treated as an inherited IRA, the basis should never be blended with any existing basis of my own
2. TurboTax is not equipped to directly handle this, i.e., I cannot create two 8606 worksheets in the system

When you say "supply TurboTax with the result," how does one do this, particularly if using the online version?  Email, upload, etc.? My current understanding is that I will have to file a supplementary 8606 offline by mail every year to the IRS. Is there a more straightforward solution that involved integration with TurboTax?  

Does the correct path forward with reporting and filing change at all for the "first year" i.e., the year of death and/or subsequent year when the account was fully inherited?

Note: To extent relevant, I am some years away from any distributions - chief concern right now is just correctly tracking basis across my own and the inherited account. Per beneficiary guidelines, I have kept this as an inherited account with plans to delay RMDs until when my late wife would have turned 72.

@Gordon3 @sandy4042 Have you found a clear path forward here?

[dmertz]

In the online version of TurboTax, when you enter a code-4 Form 1099-R with the IRA/SEP/SIMPLE box marked and answer Yes when asked if this distribution is from an inherited IRA and you indicate that you did not transfer the funds into your own IRA, TurboTax will ask, "Did you have nondeductible contributions for this IRA."  In this case TurboTax is asking if the decedent had nondeductible contributions in the IRA.  When you answer Yes, TurboTax will ask you to enter the calculated taxable amount which you will obtain from the Form 8606 that you prepare outside of TurboTax.

There is no way to integrate the externally prepared Form 8606 within TurboTax other than supplying the calculated taxable amount.  Providing the externally prepared Form 8606 to the IRS (which the instructions for Form 8606 indicate must be filed under these circumstances) requires mailing.

[sandy4042]

@dmertz @sg14d  Just to clarify, as far as filing a 8606 for a non-spousal inherited IRA with a basis, I understand that Turbotax won't prepare it, but will allow entry of the pro-rated basis so that it is correctly subtracted from the distribution.  Can you still e-file the return and mail in the paper 8606 separately and by itself (which you prepared outside of TT)?

[dmertz]

"...  but will allow entry of the pro-rated basis so that it is correctly subtracted from the distribution."

That's incorrect.  TurboTax allows you to enter the taxable amount, not the nontaxable amount.

It seems to me that e-filing and then mailing the externally prepared Form 8606 separately  is likely to trigger an underreporting notice from the IRS because they won't be processed together.

[sandy4042]

Thanks for the clarification about the correct taxable amount being allowed to be entered, but since there is no e-filed Form 8606 for the inherited IRA there would be a lack of data which would flag the return.

I can see what might be an analogous situation where an IRA distribution has a QCD.  On the 1040 both the gross distribution, and the taxable portion (less the QCD) is shown, but the IRS doesn't require detail of all the donations (though the taxpayer keep records).