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 divided into 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 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 it is a good strategy?
As for the Ford shares, I intend to sell the shares as soon as I have them. Should i pay sales tax?
You are right that the tax laws have recently changed regarding when you inherit an IRA. In 2019, the Secure Act was passed, which impacted tax rules related to inherited IRAs. Under this new legislation, you are typically required to liquidate the IRA account within a 10-year period. This eliminated the rules that require minimum distributions on an annual basis. As long as the IRA is cleared 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 were to close the IRA and accept a lump sum distribution, you would be taxed on $ 85,000. This could result in being placed in a higher tax bracket and potentially disqualifying certain deductions and credits due to higher income. Therefore, in most situations, I would not recommend doing a one-year lump-sum distribution.
I generally recommend making distributions based on your individual tax situation. In other words, only withdraw enough on an annual basis to keep you in the same tax bracket.
More: Rick Bloom: All adults need an estate plan, whether as a family or individually
More: Rick Bloom: Should I continue to pay for this life insurance policy?
Like any other tax law, there are exceptions. The main exception concerns the following beneficiaries: the spouse of the IRA owner, an individual who is no more than 10 years younger than the IRA owner, the minor child of the IRA owner, those who are disabled and those who are chronically ill. These beneficiaries can follow the 10-year rule or can take advantage of the lifetime distribution rules that were in place prior to the Secure Act. Unfortunately, in this case, the exceptions to the law do not apply.
As for the sale of Ford stock, you will potentially pay some taxes. Your security cost basis is the fair market value of that security at the date of death. Therefore, if you sell the stock at $ 14 per share and at the date of death the value was $ 13 per share, you would pay tax on $ 1 per share. The sale of shares is subject to capital gains tax and any capital gains or even losses from the sale of inherited shares are always considered to be long-term. Therefore, you would be taxed at the favorable rate of the long-term capital gain.
It is important to remember that when you receive non-IRA shares in inheritance, there is no inherited value tax. 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 a reduction in taxes and, as far as I’m concerned, the money you save fits 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, please email firstname.lastname@example.org.