You have helped me in the past, and I hope you can help me now. Earlier this year my great aunt left and I will receive an inheritance. The legacy is in two parts:
I’m somewhat confused about the tax implications of my inheritance. My first question deals with 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 about $ 85,000 and using it to pay off my mortgage. Do you think that’s a good strategy?
As for the Ford stock, I plan to sell the stock as soon as I get it. Do I have to pay any sales taxes?
You are correct that tax laws have recently changed regarding when inheriting an IRA. In 2019, the Secure Act passed, which left an impact on tax rules regarding inherited IRAs. Under this new legislation, you are generally required to liquidate your IRA account within a 10-year period. This eliminated the rules requiring minimum distributions on a yearly basis. 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 lump sum distribution, you would be taxed at $ 85,000. This can result in putting you in a higher tax category and potentially disqualifying you for certain deductions and credits due to higher income. Therefore, in many situations, I do not recommend taking a lump sum distribution in one year.
I generally recommend taking distributions based on your individual tax situation. In other words, just take enough on an annual basis to keep you in the same tax category.
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Like any other tax law, there are exceptions. The main exception has an impact on the following beneficiaries: the spouse of the owner of the IRA, an individual no more than 10 years younger than the owner of the IRA, the minor child of the owner of the IRA, those who are disabled and those who are chronically ill. These beneficiaries can either follow the 10-year rule or they can take advantage of the life distribution rules that were in place before the Safe Act. Unfortunately, in the present case, the exceptions from the law do not apply.
As for selling Ford stock, it potentially pays some taxes. Your stock cost basis is the fair market value of that stock from the date of death. So, if you sell the stock for $ 14 a share and on the date of death the value was $ 13 a share, then you pay tax on $ 1 a share. The sale of a stock is subject to capital gains tax and any capital gain or even loss due to the sale of an inherited stock, is always considered long term. Therefore, it would be taxed at the favorable rate of long-term capital gains.
It is important to remember that when you receive a non-IRA stock as an inheritance, there are no taxes on the inherited value. The only consequences of your tax are when you sell the stock.
If you inherit an IRA, it is important to develop a distribution strategy. This results in lower taxes, and as far as I’m concerned, the money you save looks better in your pocket than they do anywhere else.
Rick Bloom is a paid financial advisor only. His website is www.bloomadvisors.com. If you would like Bloom to answer your questions, email email@example.com.