You have helped me in the past, 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 bit confused about the tax implications of my inheritance. My first question deals with the IRA. I know the rules changed a few 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 this is 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 with respect to when you retire an IRA. In 2019, the Secure Act passed, which had an impact on tax rules regarding inherited IRAs. Under this new legislation, you are generally required to liquidate your IRA account within 10 years. This eliminated the rules requiring minimum distributions on a year-by-year 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 were to close the IRA and take a lump sum distribution, you would be taxed at $ 85,000. This may turn out to put you at a higher level of tax and potentially disqualify 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 affects the following beneficiaries: the spouse of the owner of the IRA, an individual who is not more than 10 years younger than the owner of the IRA, the minor child of the owner of the IRA, those who they are disabled and those who are chronically ill. These beneficiaries can either follow the 10-year rule or they can take advantage of the lifetime distribution rules that were in place before the Secure Act. Unfortunately, in the present case, the exceptions from the law do not apply.
As for selling Ford stock, you potentially pay some taxes. The basis of your stock cost 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 gains or even losses due to the sale of an inherited stock, are always considered long-term. Therefore, you will 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 inherited value taxes. The only consequences of your tax are when you sell the stock.
If you are retiring an IRA, it is important to develop a distribution strategy. This will result in lower taxes, and as far as I’m concerned, the money you save looks better in your pocket than 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, please email firstname.lastname@example.org.