Basis in IRA RMDs?

You must follow rules. You can find those rules in IRS Pub 590B. See link below.

Basically, the amount that won't be taxed represents the ratio of your basis to the total value times your RMD. In other words, a small piece of basis is returned to you on each distribution. The calculations take place on Part I of IRS Form 8606. Please note, that you can not complete Form 8606 unless you have the last Form 8606 you filed that reflects your cost basis. In other words, if you made a nondeductible contribution in some prior year or rolled over a cost basis from a qualified plan, you should have filed a Form 8606 for that year in order that the IRS knows your cost basis. If you failed to do that, you do not have a recognized basis. The IRS has been lenient on this issue and has been accepting prior year Forms 8606 to record one's basis.

After you determine your required distribution using the proper life expectancy tables for each of your IRA accounts (note that if all of your IRA accounts use the same life expectancy table you can compute the RMD using the aggregate balance), you are free to take the distribution from any account or any number of accounts. All the IRS cares about is that by year-end the total of all distributions from IRAs is at least equal to your total RMD.

So the OP could choose to take his entire RMD from an account that has no basis, and still have a portion of the distribution not be taxed as long as he has basis in another account, because all his IRAs are aggregated? Is that correct?

Bob Sandler

Alan,

Thank you very much for such a complete response.

I did do a roll-over of my 401K last year but I don't recall TaxCut asking me for my basis, or creating an 8606; I will have to check that and file an amended return if necessary. I do have an 8606 from several years ago when I had a relatively small basis in a separate IRA.

Your observation about aggregation raises an related question. This year I am getting an inherited IRA from a trust. Because of lawyers and accountants having conflicting opinions (previous thread some months ago) on whether I could use my life expectancy (I am oldest of multiple recipients), I was just going to play it safe and use the decedent's life expectancy rather than mine. I realize that I will have to calculate RMD at the individual IRA level, but does that affect my ability to take the withdrawals from whichever IRA(s) I want as long as the total is correct?

Thanks again.

Regards, Dan

Correct. For the purpose of allocating basis to an IRA distribution (it doesn't have to be the RMD) you treat all of the IRAs as if they were a single IRA. You cannot alter the amount of "return of basis" by selecting where to take the distribution from.

Ira Smilovitz

If there was a cost basis in the plan you rolled over, then you should have filed the 8606 to make an adjustment to the IRA basis that already existed. You don't need to amend your tax return as the 8606 can be filed by itself. Just prepare the 8606 for the year in question, sign it, date it and mail it to the IRS service center where you would normally file a paper return.

I do have an 8606 from several

The rules are explained on page 12 of Pub 590B. Assuming that the trust was the named beneficiary, the designated beneficiaries of the IRA are the beneficiaries of the trust as long as all of the following are true:

1. The trust is a valid trust under state law, or would be but for the fact that there is no corpus.
2. The trust is irrevocable or became, by its terms, irrevocable upon the owner's death.
3. The beneficiaries of the trust who are beneficiaries with respect to the trust's interest in the owner's benefit are identifiable from the trust instrument.
4. The trustee of the trust provides the IRA custodian or trustee with the documentation required by that custodian or trustee.

The trustee of the trust should contact the IRA custodian or trustee for details on the documentation required for a specific plan. The deadline for the trustee to provide the beneficiary documentation to the IRA custodian or trustee is October 31 of the year following the year of the owner's death.

If the trustee of the trust fails to perform as required, then the 5 year rule kicks in for the beneficiaries. If the trustee performs as required and names the beneficiaries, then Table 1 in IRS Pub 590B is used to determine the factor based on the age of the oldest beneficiary. This factor would then be used for all beneficiaries of the IRA.

You cannot aggregate the inherited IRA with your other IRAs, either for calculating the RMD or for taking the RMD. The RMD for the inherited IRA has to be taken from that IRA.

Bob Sandler

I thought that your point is only applicable when you are subject to the

After checking the rules, I concur that a beneficiary IRA RMD can not be aggregated with your other traditional IRAs. It must be taken from that beneficiary IRA.

t>rust instrument.

Alan,

In our case, the dispute between the "experts" had to do with the separate accounts provision of 590B. That is, the decedent's IRA was split into three separate inherited IRAs, one for each of the children. As a result, one set of experts said no problem, and the other said that meant we had to use the decedent's life expectancy. While it would be beneficial for at least one of the three to use my life expectancy rather that the decedent's, I am leaning towards taking the most conservative approach for my inherited IRA.

Regards, Dan

The separate account rules do not exist for a trust that is a named beneficiary! If the 4 bullets in my above reply are followed, then the beneficiaries of the trust become designated beneficiaries. A designated beneficiary uses his/her own life expectancy. If the trustee fails to name the beneficiaries by the deadline, then RMDs are determined by the age of the oldest beneficiary. Either way, the trust account can not be split into 3 separate inherited IRA accounts.

Alan,

I may have confused you with my description of the situation.

The decedent's IRA did not name a trust as the beneficiary, it named the beneficiaries of his family trust (the three children) as the IRA beneficiaries. So there is no trust account to split into three inherited IRAs. Three lawyers and an accountant told us to convert the decedent's IRA into three separate inherited IRAs, which the IRA custodian is doing.

Regards, Dan

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Yeah... you need to be a little more careful in how you phrase things: "This year I am getting an inherited IRA from a trust."

Therefore, the separate IRA rules apply as long as the three beneficiary accounts are established no later than 12/31 of the year after death. Each beneficiary will get to use their own life expectancy from Table I in IRS Pub 590B.