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In 2012 I received an inherited annuity which I rolled over into an inherited IRA, from which I am receiving RMDs. According to the 1099R from the annuity co, about half was taxable, half was not. Should I have split this up into an inherited Roth for the non-taxable amount and a regular inherited IRA for the taxable, or do we just get taxed on the whole RMD? Had I cashed it in rather than rolled it over, I only would have been taxed on half of it.

TIA,

IP
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I'll stick my neck out and say that you have basis in the IRA of the non-taxable portion of the annuity distribution. You'd need Form 8606 to work through how much of each RMD is taxable and non taxable.

--Peter
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OK, thanks Peter. Since that inherited IRA was established in 2012 and I am paying tax on my first RMD on it, that should not be too bad to amend, though I will have to get my IRA 1099-r changed to reflect the non-tax portion. I did get an RMD in 2011 from another annuity that Dad wasn't due to get an RMD from until after his death, so it came straight to me. Looking back at it the 1099R has checked off both 2B which says that taxable amt not determined and that 2A should be blank, but they put the full amount as taxable in 2A so we paid the whole thing.

Wouldn't it be nice if we could trust everyone to do their job right!

IP
with a slew of phone calls to make now on Monday
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Since that inherited IRA was established in 2012 and I am paying tax on my first RMD on it, that should not be too bad to amend, though I will have to get my IRA 1099-r changed to reflect the non-tax portion.

No, no, no.

Have you already filed your 2012 return? If not, there's nothing to amend. If you have, slow your roll so you only have to amend it once.

Did you get a 2012 1099-R for the annuity distribution? You use the data from that to complete line 2 of Form 8606. See the instructions.

1099-R's for IRA distributions are always supposed to be coded "Taxable amount unknown" since no IRA custodian has the necessary information to compute it. You use Part I of Form 8606 to calculate the taxable portion.

I did get an RMD in 2011 from another annuity that Dad wasn't due to get an RMD from until after his death, so it came straight to me. Looking back at it the 1099R has checked off both 2B which says that taxable amt not determined and that 2A should be blank, but they put the full amount as taxable in 2A so we paid the whole thing.

An annuity isn't an IRA, and the entire amount may have been taxable. You clear that up with the issuer.

Phil
Rule Your Retirement Home Fool
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though I will have to get my IRA 1099-r changed to reflect the non-tax portion.

That's not going to happen. And it's not necessary.

The IRA custodian has no idea how much of a distribution is taxable, if any. For IRA withdrawals, they're supposed to mark the box indicating the taxable amount is not determined. They can optionally leave the taxable amount box blank, but most put the distribution amount there anyway.

At any rate, a corrected 1099-R is not needed to show the non-taxable amount of an IRA withdrawal. You file Form 8606 to determine how much of an IRA withdrawal is not taxable. I believe the IRS pretty much ignores the taxable amount for IRA withdrawals, and looks to that 8606 instead.

--Peter
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An annuity isn't an IRA, and the entire amount may have been taxable. You clear that up with the issuer.

The annuities were rolled into an inherited IRA. One was clear on what was and was not taxable, about 50/50, but the other was not. Frankly, never having been exposed to annuities before, I didn't even know enough to ask the question. I got no 1099-r from them and just called to confirm the amount without knowing what was what. It's one of my calls for Mon.

2012 has been filed, we just have to pay. Amending will be necessary, and hopefully result in our paying less. I'll see how much I can get cleared up Mon.

1099-R's for IRA distributions are always supposed to be coded "Taxable amount unknown" since no IRA custodian has the necessary information to compute it. You use Part I of Form 8606 to calculate the taxable portion.

OK, well my inherited IRA RMD 1099 shows full amount as taxable, not unknown. It was the 2011 annuity disbursement 1099R that showed the unknown box checked off in 2B and 2A filled in as fully taxable, even though the instructions on the back of the form say that if 2B is checked off as unknown, that 2A should have been left blank. If it is anything like the first annuity, the initial funds used to create it should not be taxable, and only the earnings taxed. The annuity would certainly have this on file.

These annuity companies have been a royal PITA to deal with from day 1.

IP
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though I will have to get my IRA 1099-r changed to reflect the non-tax portion.

That's not going to happen. And it's not necessary.


If you guys say so. But they should sure as heck know how much of it was taxable, as they were the ones to handle the transfer, supervised supposedly by our financial planner who recently assured us he could make the transition easy for our kids if something happened to us...that this was a big part of his job. He handled all the paperwork, which was wonderful at the time, but now I am questioning his attention to detail.

Heck, when we transferred all our other accounts to them, we had to provide all the documentation to show cost basis, even in the IRAs. If they can do cost basis, they can do taxable from the info they had from the annuity cos.

IP
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I'm late to the discussion, but one thing that isn't clear to me is:
Just what kind of annuity was this?

If it was a 403(b) annuity [quasi-401(k) for governmental or exempt org. employees] then yes, it's eligible to be rolled over to an IRA.

OR if the annuity was held by an IRA, then that should be OK too.
But, as noted earlier, an IRA is not an annuity. And other run of the mill tax-deferred annuities don't necessarily qualify for rollover to an IRA. Although it would be OK to exchange them for another annuity contract in a Section 1035 transaction. (That would be coded 6 in Box 7 of the 1099-R.)

As suggested above, you need to clear that up with the issuer.

Bill
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But they should sure as heck know how much of it was taxable,

They may know how much was taxable and non-taxable of that particular rollover. But IRA accounts are not annuities. With annuities, you calculate the non-taxable portion on an annuity-by-annuity basis. Each annuity stands on it's own. Not so for IRA distributions.

You have to aggregate all of your IRA accounts when calculating the non-taxable part of any distribution. This particular custodian doesn't know about any other IRA accounts you may have. So they cannot calculate the non-taxable portion of a distribution. Only you can do that.

--Peter
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OK, so I finally figured out what the problem was and it was basically my being brain dead for last year, overwhelmed with all the financial dealings resulting from Dad's passing. Turned out I had received two IRAs AND an annuity, and the 1099R was from the annuity, issued by the same company that also had one of the IRAs. Really wish that we would get 1099rs for everything.

You have to aggregate all of your IRA accounts when calculating the non-taxable part of any distribution.

So given I have traditional IRAs, Roth IRAs and now an inherited IRA, I have to figure out somehow how much of this is taxable? And will that percentage change as I continue to add money to IRAs? The IRS won't just accept our considering the RMDs from the inherited IRA as fully taxable?

IP,

really wishing DH had listened when I suggested hiring a tax pro this year
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So given I have traditional IRAs, Roth IRAs and now an inherited IRA, I have to figure out somehow how much of this is taxable? And will that percentage change as I continue to add money to IRAs? The IRS won't just accept our considering the RMDs from the inherited IRA as fully taxable?

Let's take a deep breath. Now, calmly, separate all these into inherited in one pile and non-inherited in the other. During everything that follows, we're dealing only with the inherited. If I understand your situation, these are the only things you're receiving distributions from. Your other accounts are totally separate and don't affect any of this.

On your 2012 Form 8606 you deal with establishing the after-tax "basis" of your inherited IRA. In doing so you combine all of the inherited IRAs, regardless of how many accounts there are. As I understand it, you rolled the one inherited annuity into an inherited IRA, so the only thing we're talking about at this point is inherited IRAs.

You cannot make contributions to inherited IRAs. You can move/consolidate accounts, but always making sure that they're properly titled as inherited with a reference to the decedent. Each year your RMD is based on the prior year's ending balance and your age at the end of the current year. You may take the RMD from any account or combination of accounts you please. Each year you will complete Form 8606, Part I to determine the taxable amount of the distribution.

I hope this clears it up for you, but holler back if not, and especially if I've made any incorrect assumptions.

Phil
Rule Your Retirement Home Fool
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Let's take a deep breath. Now, calmly, separate all these into inherited in one pile and non-inherited in the other. During everything that follows, we're dealing only with the inherited. If I understand your situation, these are the only things you're receiving distributions from. Your other accounts are totally separate and don't affect any of this.

Yes, one inherited IRA into which I combined two of Dad's with a direct rollover. We are taking RMDs only from this account, as required by law. Frankly, we would prefer not to be taking any distributions right now, but the tax man want his share of Dad's IRAs. It is fully taxable.

Do I still need to file form 8606 if it is fully taxable? Not a big deal if we do, as an amended return is in our future either way.

When we tried to do a Roth conversion when it first came available, we thought it would be as simple as choosing only the IRAs whose contributions we had not been able to deduct. We are old enough to have started IRAs before Roths came out, and had some years where we could not take a tax deduction. Much to our chagrin it was way more complicated than that, and would have required figuring taxes for the conversion based on what percentages of accounts we had received a deduction for.

Now you are seeming to tell me that for the RMD, I can ignore the accounts I have not yet tapped?

Thanks Phil!

IP

IP
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Yes, one inherited IRA into which I combined two of Dad's with a direct rollover. We are taking RMDs only from this account, as required by law. Frankly, we would prefer not to be taking any distributions right now, but the tax man want his share of Dad's IRAs. It is fully taxable.

What happened to the inherited annuity? I thought you said you rolled this into an inherited IRA and that it had an after-tax basis shown on the 1099-R.

Do I still need to file form 8606 if it is fully taxable? Not a big deal if we do, as an amended return is in our future either way.

You don't need Part I of Form 8606 unless something happened during the year that affects traditional IRA post-tax "basis."

When we tried to do a Roth conversion when it first came available, we thought it would be as simple as choosing only the IRAs whose contributions we had not been able to deduct. We are old enough to have started IRAs before Roths came out, and had some years where we could not take a tax deduction. Much to our chagrin it was way more complicated than that, and would have required figuring taxes for the conversion based on what percentages of accounts we had received a deduction for.

I assume in this paragraph we're no longer talking about inherited IRAs.

Now you are seeming to tell me that for the RMD, I can ignore the accounts I have not yet tapped?

I don't know what you've tapped and what you haven't. I tried to make it clear that you do everything in isolation. Inherited in one universe. Non-inherited in a totally different universe. This will remain true even when you reach 70 1/2 and have to start RMD's from the non-inherited universe.

Phil
Rule Your Retirement Home Fool
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What happened to the inherited annuity? I thought you said you rolled this into an inherited IRA and that it had an after-tax basis shown on the 1099-R.

I posted on that this morning. I was an idiot and totally forgot that Dad had both an annuity and an IRA with one company, and an IRA with the other. It was the annuity that was partially taxable, and both IRAs, both rolled over to the inherited IRA, were fully taxable. We were only issued a 1099-R for the annuity, which I mistook as one of the IRAs, and of course for the RMD on the inherited IRA. I was not prepared for all this.

I tried to make it clear that you do everything in isolation. Inherited in one universe. Non-inherited in a totally different universe. This will remain true even when you reach 70 1/2 and have to start RMD's from the non-inherited universe.

Fabulous. Thanks.

IP
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Dad had both an annuity and an IRA with one company, and an IRA with the other. It was the annuity that was partially taxable, and both IRAs, both rolled over to the inherited IRA, were fully taxable. We were only issued a 1099-R for the annuity, which I mistook as one of the IRAs, and of course for the RMD on the inherited IRA.

<DING> Got it. All is well, and you have no need for the 8606 with respect to the inherited IRA.

Phil
Rule Your Retirement Home Fool
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