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Lane
Lane, JD, CFP, MBA, CRPS
Category: Capital Gains and Losses
Satisfied Customers: 15831
Experience:  Have been providing Financial and Tax advice for 30 years.Concentration in Corporations, Estate, Income Tax and Business Planning
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My mother died at age 96 and I inherited an IRA from her. I

Customer Question

My mother died at age 96 and I inherited an IRA from her. I am age 75. Do I owe any income tax on the distributions from that IRA?
Submitted: 12 months ago.
Category: Capital Gains and Losses
Expert:  Lane replied 12 months ago.

Hi. My name's Lane.

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If the account holder was over 70½, as a non--spouse heir, these are your choices.

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Option #1: Open an Inherited IRA: Life Expectancy Method

Account type
You transfer the assets into an Inherited IRA held in your name.

Money is available

You must begin taking an annual RMD over your life expectancy beginning no later than 12/31 of the year following the original account holder's death.

Note: If the original account holder did not take an RMD in the year of death, an RMD must be taken from the account by 12/31 of the year the original account holder died.

  • Your annual distributions are spread over your single life expectancy (determined by your age in the calendar year following the year of death and reevaluated each year) or the deceased account holder's remaining life expectancy, whichever is longer - and taxed a ordinary income as the distributions occur

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  • Required Minimum Distributions (RMDs) are mandatory and you are taxed on each distribution

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  • You will not incur the 10% early withdrawal penalty.Undistributed assets can continue growing tax-deferred.You may designate your own IRA beneficiary.

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Option #2: Lump Sum Distribution

Account typeNone. All assets in the IRA are distributed to you.

Money is availableAll at once.

  • You will pay income taxes on the distribution all at once.

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  • You will not incur the 10% early withdrawal penalty

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  • You may move to a higher tax bracket depending on the amount of the distribution and your current income level.
Customer: replied 12 months ago.
You did not address the taxability of her IRA. Since it was a gift to me on the date of her death, shouldn't my cost basis be the value on that date?
Expert:  Lane replied 12 months ago.

Sorry, some of that formatting did not transfer well. But the bottom line is that you must either use the life expectancy method (and here, that would be over the remaining life expectancy of your mother as per the mortality tables), or take a distribution and pay the tax.

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IRA's do not get a step up in basis as capital assets owned individually.

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IRA's and other qualified assets come with something called IRD (Income in respect of a decedent) ... becacsue the dollars have never been taxed.

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Step up in basis only applies to after-tax capital assets

Expert:  Lane replied 12 months ago.

Please let me know if you have ANY questions at all, before rating me.

If this has helped, and you DON’T have other questions … I'd appreciate a positive rating, using the stars on your screen, and then clicking “submit" – That’s the only way I’ll be credited for the work.

I hope you’ll rate me based on my accuracy and thoroughness (as opposed to any good news/bad news content). Thank you!

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But again, if you need more on this, please let me know.

Lane

I hold a law degree (J.D.), with concentration in Tax Law, Estate law & Corporate law, an MBA in finance, a BBA, and CFP & CRPS (Chartered Retirement Plans Specialist) designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, on three continents, since 1986.

Expert:  Lane replied 12 months ago.
Did you see my answer? So sorry, but step up in basis to FMV of assetson date of death does not apply to IRA’s
Expert:  Lane replied 12 months ago.
Hi, Lane here.
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I’m just checking back in to see how things are going.
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Did my answer help?

If so, I'd appreciate a positive rating, using the stars on your screen, and then clicking “submit" – That’s the only way I’ll be credited for the work.

But if you need more on this please let me know

Lane