You have helped me in the past, and I hope you can help me now. Earlier this year my great-aunt passed away and I will receive an inheritance. The inheritance is in two parts:
I’m 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; therefore, I would like to know what my options are. I considered taking the money, which is about $ 85,000, and using it to pay off my mortgage. Do you think that’s a good strategy?
As for Ford shares, I plan to sell the stock as soon as I acquire it. Should I pay taxes on the sale?
You are right that tax laws have just changed about when you inherit an IRA. In 2019, the Security Act was passed, which affected tax rules on inherited IRAs. Under this new legislation, you generally have to liquidate the IRA account within a 10-year period. This removed the rules requiring minimum distributions annually. As long as the IRA is liquidated within 10 years, distributions of any amount can be taken at any time.
When distributions are made by a traditional IRA, the individual receiving the distributions is taxed on that money as ordinary income. Therefore, if you closed the IRA and took a total distribution, you would receive a tax of $ 85,000. This could result in putting you in a higher tax bracket and may disqualify you for some deductions and credits due to the higher income. Therefore, in most situations, I would not recommend making a complete distribution in one year.
I generally recommend making distributions based on your individual tax situation. In other words, just take out enough a year to keep you at the same rate.
More: Rick Bloom: All adults need a farm plan, whether family or individual
More: Rick Bloom: Do I need to continue to pay for this life insurance?
Like any other tax law, there are exceptions. The main exception affects the following beneficiaries: the spouse of the IRA owner, an individual who is not more than 10 years younger than the IRA owner, the youngest child of the IRA owner, those who are disabled and those , who are chronically ill. These beneficiaries can either follow the 10-year rule or can benefit from the lifetime distribution rules that were implemented before the Security Act. Unfortunately, in the case, the exceptions to the law do not apply.
As for the sale of Ford shares, you may have to pay some taxes. Your cost base of the shares is the fair market value of those shares from the date of death. Therefore, if you sold the stock at $ 14 per share and on the date of death the value was $ 13 per share, then you would pay tax at $ 1 per share. The sale of shares is subject to capital gains tax and any capital gain or even losses due to the sale of inherited shares is always considered long-term. Therefore, you would be taxed according to the favorable long-term capital gain.
It is important to remember that when you receive non-IRA stock as an inheritance, there are no taxes on the inherited value. Your only tax consequences are when you sell the shares.
If you do inherit an IRA, it is important to develop a distribution strategy. This will result in lower rates, and in my opinion, the money you save looks better in your pocket than anywhere else.
Rick Bloom is a free financial advisor. His website is www.bloomadvisors.com. If you would like Bloom to answer your questions, email email@example.com.