Inherited inherited IRA

[Justataxguy]

Client's 85 year old mom passed away in 2012. Client inherited mom's IRA which mom inherited when husband died 10+ years ago. My software is asking for "the total of all nondeductible contributions that were made to the decedent's traditional IRA in all years prior to 2012, less any withdrawals or distributions of nondeductible contributions in those years." Mom was a client for several years after husband died, so I know she had no contributions, but have no idea how things were for the husband's original IRA, as to whether or not any contributions were nondeductible or if the IRA was a rollover from some other retirement account - 401K, etc., and if it was a rollover, would that be classified as a nondeductible contribution?

[Burke]

Without any records to prove to the contrary, you must treat it all as a traditional, deductible, taxable IRA. Just because it was rolled over from her deceased husband does not make it a non-deductible contribution. If she was 85, she must have been receiving RMD's each year from the account. Were they reported as 100% taxable by the payor/custodian? If so, you have your answer. If any of it had been non-deductible contributions, Form 8606 would have been filed on her returns. Generally, if there are non-deductible contributions included in an IRA account, the custodian would have issued two 1099-R's that year when it was distributed. One taxable and one not taxable.

[Traveling EA]

Without any records to prove to the contrary, you must treat it all as a traditional, deductible, taxable IRA. Just because it was rolled over from her deceased husband does not make it a non-deductible contribution. If she was 85, she must have been receiving RMD's each year from the account. Were they reported as 100% taxable by the payor/custodian? If so, you have your answer. If any of it had been non-deductible contributions, Form 8606 would have been filed on her returns. Generally, if there are non-deductible contributions included in an IRA account, the custodian would have issued two 1099-R's that year when it was distributed. One taxable and one not taxable.

How does the custodian know if the IRA's were deductible or not deductible? A taxpayer could have put money into an IRA thinking it would be deductible on Jan 2, but found out on April 10th that he did not qualify for a deductable IRA. As far as I know, the only place it shows up is on form 8606. The custodian does not get a copy of the 8606 to know what had been deductible vs non-deductible. The only thing I have seen the custodian have knowlege of is if the IRA was a roth or traditional ira.

[DMICPA]

Non Deductible IRA

I am just thinking, if an IRA is non deductible, why wouldn't the basis be stepped up at date of Death?

The law is clear on deductible IRAs because there was a tax benefit but a non-deductible is similar to a savings account. The funds are not taxed when pulled out, the earnings are.

Why not a step up?

[bgiez]

There is no step up in basis on a savings account and

I am just thinking, if an IRA is non deductible, why wouldn't the basis be stepped up at date of Death?

The law is clear on deductible IRAs because there was a tax benefit but a non-deductible is similar to a savings account. The funds are not taxed when pulled out, the earnings are.

Why not a step up?

the earnings/interest are taxable. I don't see the analogy.

[bgiez]

Yep

How does the custodian know if the IRA's were deductible or not deductible? A taxpayer could have put money into an IRA thinking it would be deductible on Jan 2, but found out on April 10th that he did not qualify for a deductable IRA. As far as I know, the only place it shows up is on form 8606. The custodian does not get a copy of the 8606 to know what had been deductible vs non-deductible. The only thing I have seen the custodian have knowlege of is if the IRA was a roth or traditional ira.

I agree with traveling EA. The custodian doesn't know whether the contribution was deductible or non-deductible.

[Burke]

How does the custodian know if the IRA's were deductible or not deductible? A taxpayer could have put money into an IRA thinking it would be deductible on Jan 2, but found out on April 10th that he did not qualify for a deductable IRA. As far as I know, the only place it shows up is on form 8606. The custodian does not get a copy of the 8606 to know what had been deductible vs non-deductible. The only thing I have seen the custodian have knowlege of is if the IRA was a roth or traditional ira.

You are absolutely right. Wasn't thinking through enough. Brain fried. I was thinking of tax-sheltered annuities where they are clearly labeled Qualified and Non-Qualified, so you know which ones are fully taxable (IRA's) and which ones on which just the earnings are taxable. And now we have the ROTH's which we know are funded with after-tax dollars.

[Burke]

I am just thinking, if an IRA is non deductible, why wouldn't the basis be stepped up at date of Death?

Because Congress decreed it so. Just like annuities. No step-up.