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’m going to receive a legacy. The legacy is in two parts:
I am slightly 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 down on my mortgage. Do you think that is a good strategy?
As for Ford stock, I plan to sell the stock as soon as I get it. Would I have to pay any taxes on the sale?
Thank you, Ted
You are correct that tax laws have changed recently as to when you inherit an IRA. In 2019, the Secure Act was passed, which affected tax rules regarding legacy IRAs. Under this new legislation, you are generally required to cancel the IRA account within a 10-year period. This removed the rules that require minimum year-on-year distribution. Provided the IRA is dissolved within 10 years, apportionments of any amount can be taken at any time.
When distributions are made from a traditional IRA, the person receiving the apportionments on that money is taxed as ordinary income. So if you were to shut out the IRA and take a lump sum distribution, you would be taxed at $ 85,000. This could result in you being placed in a higher tax bracket and potentially disqualifying you for certain deductions and credits because of the higher income. Therefore, in most situations, I would not recommend taking a lump sum distribution in a year.
Generally, I recommend taking apportionments based on your individual tax situation. That is, just take enough out each year to keep you in the same tax bracket.
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Like all other tax laws, there are exceptions. The major exception affects the following beneficiaries: the spouse of the IRA owner, a person who is not more than 10 years younger than the owner of the IRA, the minor child of the owner of the IRA, the disabled and those who seriously ill. These beneficiaries can either follow the 10-year rule or take advantage of the life time distribution rules that were in effect before the Safe Act. Unfortunately, in the case in question, the exceptions to the law do not apply.
When it comes to selling Ford stock, you may pay some taxes. Your cost basis on the stock is the fair market value of that stock at the date of death. So if you sell the stock at $ 14 a share and at the date of death the value was $ 13 a share, then you would pay tax at $ 1 a share. The sale of stock is subject to capital gains tax and any capital gains or even losses due to the sale of inherited stock are always considered in the long term. So, you would be taxed at the favorable long-term capital gains rate.
It is important to remember that when you receive non-IRA stock as an inheritance, there are no taxes on the hereditary value. Your 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 taxes, and as far as I know, the money you save looks better in your pocket than it does anywhere else.
Rick Bloom is a fee-only financial advisor. His website is www.bloomadvisors.com. If you would like Bloom to respond to your questions, please email email@example.com.