You’ve helped me before, and I hope you can help me now. Earlier this year, my great-grandmother passed away and I will inherit. The legacy is in two parts:
I’m a little confused about the tax consequences 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 considered taking the money, which is around $ 85,000, and using it to pay down 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 tax on the sale?
You’re right that tax law has recently changed when you inherit an IRA. In 2019, the Secure Act was passed, which affected 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 that require minimum payouts on a year-by-year basis. As long as the IRA is settled within 10 years, distributions of any amount can be made at any time.
When distributions are made from a traditional IRA, the person who receives the distributions is taxed on the money as ordinary income. Therefore, if you were to close the IRA and take a one-time dividend, you would be taxed at $ 85,000. This could result in you being placed in a higher tax bracket and potentially disqualifying 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 dividends 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 laws, 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 recipients can either follow the 10-year rule or take advantage of the lifetime distribution rules that were in force before the Security Act. Unfortunately, the exceptions from the law in the case in question do not apply.
When it comes to selling Ford shares, you will potentially pay some taxes. The cost basis for the share is the fair market value of the share at 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 will pay tax of $ 1 per share. The sale of shares is subject to capital gains tax, and any capital gain or even loss due to the sale of inherited shares is always considered long-term. Therefore, you will be taxed at the favorable long-term profit rate.
It is important to remember that when you receive non-IRA shares as an inheritance, there are no taxes on the inheritance 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 result in lower taxes, and as far as I’m concerned, the money you save looks better in your pocket than it does anywhere else.
Rick Bloom is a financial advisor who only costs money. His website is www.bloomadvisors.com. If you would like Bloom to answer your questions, please email email@example.com.