How can I know whether an inherited IRA has basis or not?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Opera Lover
Posts: 15
Joined: Mon May 02, 2011 2:25 pm

How can I know whether an inherited IRA has basis or not?

Post by Opera Lover » Fri Feb 17, 2012 12:53 pm

I have a small traditional IRA worth about $15,000 that I inherited from my father who died in 2005. It was held at Morgan Stanley Smith Barney in a Legg Mason Gov't Securities Fund.

Last year being dissatisfied with MSSB’s service, I transferred the account over to Vanguard, re-investing it in the Vanguard Balanced Index Fund.

This month, in preparation for doing my income tax, I received 2 1099-R’s, one from MSSB and one from Vanguard.

Reading through the tax instructions, it looks like I need to file a form 8606 if the inherited IRA had any basis. But how can I tell whether it has basis or not?

MSSB sent me a listing of all the trades in the account going back to when it was opened in 1998. Since at this point my father was 76 and had been retired for 14 years, I would assume that he would have received all his contributions back as distributions and that these subsequent trades were all dividends. Hence the basis for the account would be zero.

Or am I not thinking this through correctly?

livesoft
Posts: 62716
Joined: Thu Mar 01, 2007 8:00 pm

Re: How can I know whether an inherited IRA has basis or not

Post by livesoft » Fri Feb 17, 2012 12:58 pm

Look at your father's tax returns. Did he ever file a form 8606?
Wiki This signature message sponsored by sscritic: Learn to fish.

DSInvestor
Posts: 10882
Joined: Sat Oct 04, 2008 11:42 am

Re: How can I know whether an inherited IRA has basis or not

Post by DSInvestor » Fri Feb 17, 2012 1:04 pm

MMSB's list of trades may tell you contributions he made, what withdrawals he took and all trading activity but it cannot tell you whether your father took the tax deductions for his contributions (IRA basis). You need your father's tax returns to see whether he took the deduction. If he didn't take the deductions, his tax returns should have form 8606 to track the IRA basis.
Wiki

User avatar
damjam
Posts: 942
Joined: Thu Mar 25, 2010 7:46 am

Re: How can I know whether an inherited IRA has basis or not

Post by damjam » Fri Feb 17, 2012 1:07 pm

Basis with regard to IRAs has to do with whether there were ever non-deductible contributions.
From the IRS:
You will have a cost basis in your traditional IRA if you made any nondeductible contributions. Your cost basis is the sum of the nondeductible contributions...
If you made nondeductible contributions or rolled over any after-tax amounts to any of your traditional IRAs, you have a cost basis (investment in the contract) equal to the amount of those contributions. These nondeductible contributions are not taxed when they are distributed to you. They are a return of your investment in your IRA.

sscritic
Posts: 21858
Joined: Thu Sep 06, 2007 8:36 am

Re: How can I know whether an inherited IRA has basis or not

Post by sscritic » Fri Feb 17, 2012 1:12 pm

You can always just ignore the problem and pay tax on the full amount withdrawn. It's like having received a gift of a stock many years ago and you don't know the donor's basis. You can always use $0; you pay more tax but that's what bad records get you.

User avatar
HueyLD
Posts: 6075
Joined: Mon Jan 14, 2008 10:30 am

Re: How can I know whether an inherited IRA has basis or not

Post by HueyLD » Fri Feb 17, 2012 4:12 pm

Kenmore Bob wrote:Reading through the tax instructions, it looks like I need to file a form 8606 if the inherited IRA had any basis. But how can I tell whether it has basis or not?
Your question is so common and it is a real problem for a lot of people. There are also older people who lost their paperwork and couldn't remember their tax basis for after tax contributins to IRAs or 401(K). In a lot of such cases, taxes are paid twice and that's very unfortunate.

The good news for you is: the inherited IRA balance is very small and thus the tax effect. Hopefully you can find some of your father's old tax returns for F8606.

User avatar
tuckeverlasting
Posts: 295
Joined: Sun Mar 27, 2011 9:50 pm
Location: The Emerald City

Re: How can I know whether an inherited IRA has basis or not

Post by tuckeverlasting » Fri Feb 17, 2012 4:44 pm

Here is some information I saved from when I was wrestling with this same problem:
If no Form 8606 is found--you might also look for Form 5498 which
shows an IRA contribution was made. Then look at the tax return for
the year the contribution was made to see if a deduction was claimed
for the contribution. If not then it was a non-deductible contribution
(and there is basis).

Any rollovers into the IRA containing basis also bring the basis with them. You don't have to look
back earlier than 1987 as that was the first year non-deductible IRA
contributions were made.
It's Good To Be A Boglehead

User avatar
Epsilon Delta
Posts: 7430
Joined: Thu Apr 28, 2011 7:00 pm

Re: How can I know whether an inherited IRA has basis or not

Post by Epsilon Delta » Fri Feb 17, 2012 5:37 pm

Whoa Nellie.

You should have already take Minimum Required Distributions from this account (or closed it completely within 5 years of his death) and gotten 1099's in prior years. Thus in theory if there is any inherited basis you have already claimed it on the 8086s you have already filed.

If you haven't been taking distributions and these are the first 1099s you've received for this inherited IRA you have a problem. If this is the case you may want to ask how to fix this.

Now to answer the question you asked:
Since your father was well over 70 when he died he was supposed to take MRD from some IRA (not necessarily this one). If he has any basis he should have filed form 8086. In theory all you need is his last tax return, presumably from 2004. In practice if he was not in a good mental state in 2004 you might want to look back a few more years. If you can't find the tax returns and are the executor of the estate you might be able to get copies or a transcript from the IRS.

Alan S.
Posts: 7742
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: How can I know whether an inherited IRA has basis or not

Post by Alan S. » Sat Feb 18, 2012 4:31 pm

You indicated you received two 1099R forms, one from each each custodian. Typically, you would only have one, from whichever custodian you took the 2011 RMD. While you may have taken small amounts out from each custodian, I hope you did a direct trustee transfer because you cannot do an indirect rollover with a non spouse inherited IRA. Anything that would make you report a rollover on line 15 of Form 1040 will not fly and the IRS will consider the amount rolled over a taxable distribution and an excess contribution to the new IRA.

If you can explain why the two 1099R forms were issued instead of one, please advise.

Opera Lover
Posts: 15
Joined: Mon May 02, 2011 2:25 pm

Re: How can I know whether an inherited IRA has basis or not

Post by Opera Lover » Tue Feb 21, 2012 3:58 pm

Thanks to all for your great advice!

I found out from my brother, who was Dad’s executor, that the paperwork from Dad’s last tax return was huge, and that he doesn’t recall any form 8606 being in them, He also said that his tax preparer pays taxes on the entire amount of the annual RMD drawn from his share of this IRA.

I’m inclined to pay taxes on the full amount of my distributions as well. While I have some inkling of how to calculate the cost basis in order to file the 8606, I’m nervous that filing the form will trigger an audit.

In answer to Alan S.’s question, I transferred the IRA to Vanguard on 11 January 2011 but there was a small ‘death benefit distribution’ of $12.58 issued by MSSB on 18 Mar 2011 resulting in a 1099-R. Vanguard issued the RMD of $753 on 23 Jan 2011.

Post Reply