You have helped me in the past and I hope you can help me now. At the beginning of this year my great-aunt passed away and I am going to receive an inheritance. The inheritance is divided into two parts:
I am somewhat confused about the tax implications of my inheritance. My first question is about the IRA. I know the rules changed a couple of years ago; therefore, I would like to know what my options are. I was considering taking the money, which is roughly $ 85,000, and using it to pay off my mortgage. Do you think it is a good strategy?
Regarding Ford shares, I plan to sell the shares as soon as I have them. Would I have to pay any sales tax?
You are correct that tax laws have recently changed regarding when you inherit an IRA. In 2019, the Safe Law was passed, affecting the tax rules regarding inherited IRAs. Under this new legislation, you are generally required to liquidate the IRA within a 10-year period. This removed the rules requiring minimum year-to-year distributions. As long as the IRA is settled within 10 years, distributions of any amount can be taken at any time.
When distributions are made from a traditional IRA, the person receiving the distributions pays taxes on that money as ordinary income. Therefore, if you closed the IRA and took a lump sum distribution, you would be taxed on $ 85,000. This could result in placing you in a higher tax bracket and potentially disqualifying you for certain deductions and credits due to higher income. Therefore, in most situations, I would not recommend taking a lump sum distribution in one year.
In general, I recommend taking distributions based on your individual tax situation. In other words, only take out enough annually to keep it in the same tax bracket.
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Like any other tax law, there are exceptions. The main exception affects the following beneficiaries: the IRA owner’s spouse, a person who is not more than 10 years younger than the IRA owner, the minor child of the IRA owner, the disabled, and those with illnesses Chronicles. These beneficiaries can follow the 10-year rule or they can take advantage of the lifetime distribution rules that were in effect before the Safe Law. Unfortunately, in the present case, the exceptions of the law do not apply.
Regarding the sale of Ford shares, you may pay some taxes. Your share cost basis is the fair market value of those shares as of the date of death. Therefore, if you sell the stock at $ 14 per share and on the date of your death the value was $ 13 per share, then you would pay taxes on $ 1 per share. The sale of shares is subject to capital gains tax and any capital gain or even loss from the sale of inherited shares is always considered long term. Therefore, you will be taxed at the favorable long-term capital gain rate.
It is important to remember that when you receive non-IRA shares as an inheritance, there are no taxes on the inherited value. Your only tax consequences are when you sell the shares.
If you inherit an IRA, it is important to develop a distribution strategy. This will result in lower taxes and, as far as I am concerned, the money you save looks better in your pocket than anywhere else.
Rick Bloom is a paying financial advisor. His website is www.bloomadvisors.com. If you would like Bloom to answer your questions, please email firstname.lastname@example.org.