How Do I Report an Inherited Roth IRA Distribution?
Beneficiaries of an IRA account often have various options available to them when inheriting it, each having different tax and distribution timeline implications.
One strategy for sole beneficiaries would be transferring assets into an IRA in your name; this can allow the distributions to remain spread out over your expected lifespan.
Form 1099-R
Form 1099-R provides an account summary of distributions made from an IRA or retirement plan. It lists both the gross amount and taxable amount for each distribution made during a calendar year; usually this latter number will be less than total distribution amount reported here. Box 1 displays each distribution’s gross amount while box 2a provides information as to whether or not tax applies.
Calculating the taxable portion of a distribution involves using the IRS Single Life Expectancy table and factoring annual distributions by this formula.
IRA rules can be complex and differ depending on the type of account, your age and marital status. For more guidance and advice, it’s wise to speak to a tax professional. Please be aware that this article serves only as general guidance; any specific inquiries must be directed toward your advisor(s). Thank you – In order to continue reading, log-in now.
Form 1099-B
Assuming ownership of an inherited IRA comes with certain tax-related responsibilities. If you’re not married to the deceased account owner, required minimum distributions (RMDs) must be taken from it in order to prevent tax-deferred investments from growing too long in tax deferral status.
Roth IRAs that have been inherited have special RMD rules; beneficiaries can withdraw withdrawals according to their life expectancy, provided that no funds from other accounts are mixed with the inheritance funds in one account. According to new retirement legislation passed in 2019, this type of beneficiary is known as an “eligible designated beneficiary”.
If you aren’t an eligible designated beneficiary, the account must be empty within 10 years from its original owner’s death. While withdrawals over time might seem more convenient, the taxes and early withdrawal penalties that accrue for such withdrawals make this choice unfeasible – generally speaking it would be wiser for non-spouse beneficiaries to opt for one lump sum withdrawal instead.
Form 1099-INT
When inheriting an IRA, it is crucial that you understand its rules and distribution procedures. The IRS website offers extensive guidance on this matter and you may also receive more details from the financial institution managing the account. Your custodian should indicate this by placing an “Q” or “T” in Box 7 of Form 1099-R as proof that the required minimum distribution (RMD) has been completed.
If the inherited IRA is a Roth, you may be able to leave its contents inside indefinitely as long as its former owner followed withdrawal rules. Under the SECURE Act, most nonspouse beneficiaries must empty their inherited Roth accounts within 10 years after original owner has passed on; certain groups may qualify for exemptions.
If you inherit an interest-bearing account and receive interest income, filing Form 1099-INT with the IRS is mandatory. This form indicates how much interest was received along with other pertinent details.
Form 1099-DIV
Under IRA regulations, beneficiaries typically are required to empty an inherited account within 10 years after the account holder’s death. Annual required minimum distributions (RMDs) for individual beneficiaries are calculated using the IRS Single Life Table and taking into account both factors.
Trust and estate beneficiaries, however, often take longer. In such a situation, an IRA should still enjoy at least 10 years of tax-free growth before becoming subject to taxes again. The same rule generally applies when inheriting Roth accounts as well.
Form 1099-DIV will enable you to report all IRA income. Write “Q” or “T” in Box 7 to indicate an inheritance account distribution. Forms can also be obtained directly from your IRA custodian or on the IRS website, while there is also a free tax preparation program offered by them that will assist in filing taxes.
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