You have helped me in the past and I hope you can help me now. At the beginning of the year my great aunt passed away and I will receive an inheritance. The legacy consists of two parts:
I am a little confused about the tax implications of my inheritance. My first question is about the IRA. I know the rules changed a few years ago; So I would like to know what options I have. I thought about taking the money, which is roughly $ 85,000, and using it to pay off my mortgage. Do you think that is a good strategy?
As for Ford stock, I plan to sell the stock as soon as I get it. Do I have to pay any taxes when selling?
You are right that when you inherit an IRA, the tax laws have recently changed. In 2019, the Secure Act was passed, which affected tax regulations for inherited IRAs. Under this new legislation, you are generally required to liquidate the IRA account within a period of 10 years. This means that the regulations that prescribe an annual minimum distribution are no longer applicable. As long as the IRA is liquidated within 10 years, distributions of any amount can be made at any time.
If distributions are made by a traditional IRA, the person receiving the distributions will be taxed on that money as normal income. So if you close the IRA and make a lump sum distribution, you will be taxed at $ 85,000. This could result in your being placed in a higher tax bracket and potentially excluding you from certain deductions and credits due to higher income. Therefore, in most situations, I would not recommend making a flat-rate distribution in one year.
I generally recommend making distributions based on your individual tax situation. In other words, you only take out so much each year that you stay in the same tax bracket.
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As with any other tax law, there are exceptions. The greatest exception applies to the following beneficiaries: the spouse of the IRA owner, someone no more than 10 years younger than the IRA owner, the minor child of the IRA owner, the disabled and the chronically ill. These beneficiaries can either follow the 10 year rule or use the lifelong distribution rules that were in effect prior to the Secure Act. Unfortunately, the exceptions to the law do not apply in the present case.
You may have to pay some taxes in relation to selling Ford stock. Your cost base for the stock is the market value of that stock on the day of your death. So if you sold the stock for $ 14 per share and its value on the day of death was $ 13 per share, you would be paying tax on $ 1 per share. The sale of shares is subject to capital gains tax and any capital gain or loss from the sale of inherited shares is always considered long term. Hence, you would be taxed at the favorable long-term capital gains rate.
It is important to remember that if you receive non-IRA stocks as an inheritance, there will be no taxes on the inherited value. You only have tax consequences if you sell the share.
When you inherit an IRA, it is important to develop a distribution strategy. This translates into lower taxes and to me the money you save looks better in your pocket than anywhere else.
Rick Bloom is a paid financial advisor. His website is www.bloomadvisors.com. If you’d like Bloom to answer your questions, email email@example.com.