You’ve helped me before, and I hope you can help me now. Earlier this year, my great-aunt died, and I will receive an inheritance. The legacy 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 were changed a couple of years ago; therefore I want 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 this is a good strategy?
As for the Ford stock, I plan to sell the stock as soon as I get it. Did I have to pay any sales tax?
You are right that the tax rules have recently changed when you inherit an IRA. In 2019, the Secure Act was passed, which affected the tax rules for hereditary IRAs. Under this new legislation, you must generally liquidate your IRA account within a ten-year period. This eliminated the rules that require a minimum distribution on a year-to-year basis. As long as the IRA is settled within 10 years, the distribution of any amount can be taken at any time.
When distributions are made from a traditional IRA, the individual who receives the distributions of the money is taxed as ordinary income. Therefore, if you were to close the IRA and make a one-time distribution, you would be taxed at $ 85,000. This can lead to a higher tax bracket and potentially disqualify you from certain deductions and credits due to higher income. Therefore, in most situations I would not recommend taking a one-time distribution of one year.
I generally recommend taking distributions based on your individual tax situation. In other words, just take out enough on an annual basis to stay in the same tax bracket.
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Like all other tax rules, there are exceptions. The largest exception affects the following recipients: the IRA owner’s spouse, a person who is not more than 10 years younger than the IRA owner, the IRA owner’s minor children, those with disabilities 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 in force before the Secure Act. Unfortunately, in the present case, the exceptions from the law do not apply.
When it comes to selling the Ford stock, you will potentially pay some taxes. The cost basis for the share is the fair market value of that share from the date of death. Therefore, if you sell the stock at $ 14 per share and at the time of death the value was $ 13 per share, you would pay tax of $ 1 a share. The sale of shares is subject to capital gains tax, and any gain or loss even due to the sale of an inherited share is always considered long-term. Therefore, you will be taxed with the favorable long-term profit rate.
It is important to remember that when you receive non-IRA shares as an inheritance, there is no tax on the inherited value. The only tax consequences are when you sell the stock.
If you inherit an IRA, it is important to develop a distribution strategy. This will lead to lower fees, and to me the money you save looks better in your pocket than they do anywhere else.
Rick Bloom is a financial advisor. His website is www.bloomadvisors.com. If you would like Bloom to answer your questions, please email firstname.lastname@example.org.