How to Determine the Basis of an Inherited IRA
Understanding the basis of an inherited IRA is crucial for individuals who have inherited an Individual Retirement Account (IRA) from a deceased account holder. The basis of an inherited IRA refers to the value of the account at the time of the original owner’s death, which is used to calculate taxes on distributions. Determining the basis correctly can help avoid unnecessary tax liabilities and ensure compliance with IRS regulations. In this article, we will guide you through the process of determining the basis of an inherited IRA.
1. Identify the Original Account Holder’s Basis
The first step in determining the basis of an inherited IRA is to identify the basis of the original account holder. The basis can be one of the following:
– The original account holder’s cost basis: This is the amount the original account holder paid for the IRA, including any contributions and any rollovers from other retirement accounts.
– The fair market value (FMV) of the IRA at the time of the original account holder’s death: If the original account holder did not have a cost basis, the basis is the FMV of the IRA at the time of death.
– The FMV of the IRA at the time of the original account holder’s death, reduced by any applicable life insurance proceeds: If the original account holder passed away with a life insurance policy that named the IRA as a beneficiary, the basis is the FMV of the IRA minus the life insurance proceeds.
2. Calculate the Inherited IRA’s Basis
Once you have identified the original account holder’s basis, you can calculate the inherited IRA’s basis. If the original account holder’s basis was the cost basis, the inherited IRA’s basis is the same as the original account holder’s basis. However, if the basis was determined using the FMV or the FMV minus life insurance proceeds, you must adjust the basis based on the inherited IRA’s value at the time of the original account holder’s death.
3. Adjust the Basis for Post-Death Contributions
If the original account holder made contributions to the IRA after the valuation date, you must adjust the basis accordingly. Subtract the post-death contributions from the inherited IRA’s basis to reflect the correct value.
4. Keep Detailed Records
Maintaining detailed records of the inherited IRA’s basis is essential for tax purposes. Keep copies of the original account holder’s IRA statements, death certificate, and any other relevant documents that can help you determine the basis.
5. Consult a Tax Professional
Determining the basis of an inherited IRA can be complex, especially if the original account holder had a significant amount of money in the account or if there were multiple beneficiaries. If you are unsure about the process, it is advisable to consult a tax professional who can provide guidance and ensure that you comply with IRS regulations.
In conclusion, determining the basis of an inherited IRA is an important step in managing the inherited account. By following these steps and seeking professional advice when necessary, you can ensure that you accurately calculate the basis and avoid potential tax liabilities.
