I opened an inherited IRA account just long enough to receive the funds and cash out the account. What are the tax ramifications of doing so?

[DDollar · Accepted solution]

Unless a portion of the IRA was from after-tax contributions, the entire amount will be taxable income.  If there was a portion that was from non-deductible IRA contributions, then that portion of the distribution is not taxable.

[taxigirl]

My distribution is showing up as taxable under the retirement summary. How is this so if all contributions were after-tax? How was I supposed to answer the interview question: Where is this distribution from?

[dmertz]

What makes the contributions after-tax?  Did the deceased make after-tax contributions?

[taxigirl]

Yes, she did.

[dmertz]

Was the inherited IRA traditional or Roth?  What is the code in box 7 of the Form 1099-R provided by the payer?

[dmertz]

If this was an inherited traditional IRA (code 4 with the IRA/SEP/SIMPLE box marked), you'll need to prepare Form 8606 Part I separately from TurboTax because TurboTax does not support the preparation of Forms 8606 for inherited traditional IRAs.  For an inherited traditional IRA, TurboTax only asks you to enter the taxable result from the calculation on the Form 8606 that you've manually prepared.  You'll need to mail your tax return and include the Form 8606.

[taxigirl]

Thank you. Very helpful advice!

[taxigirl]

By the way, the code in box 7 was a “4”.