Life and Death Planning for Retirement Benefits

Chapter 2: Income Tax Issues

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 Nondeductible “regular” IRA contributions . A participant may have after-tax money in his IRA as the result of nondeductible contributions made to the account in 1987 or later years. See § 408(o) , added by § 1102 of TRA ’86.

 Excess IRA contributions not returned by due date of return. See ¶ 2.1.08 (H).

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Contribution of a “qualified reservist distribution.” See ¶ 2.7.04 (C).

 Rollover of after-tax money from a QRP after 2001. § 401(a)(31) and § 402(c)(2) permit nontaxable as well as taxable amounts to be rolled over from a QRP to a traditional IRA after 2001; see ¶ 2.6.02 (H). A participant is required to file Form 8606 for any year in which he either: makes a nondeductible contribution to an IRA (presumably including a rollover contribution that contains after-tax money); takes a distribution from a traditional IRA at a time when he had after-tax money in any of his traditional IRAs; converts any part of an IRA to a Roth IRA ( ¶ 5.4 ); or takes a distribution from a Roth IRA. Instructions for IRS Form 8606 (2016), p. 1. It is convenient to file the Form every year, if the participant has after-tax money in his IRAs, even if there is no event that triggers the requirement, just as a way to conveniently keep track of the basis. Form 8606 is attached to the individual’s Form 1040, but may be filed separately if the individual is not required to file Form 1040. Part of the information reported on Form 8606 is the participant’s basis in his traditional IRAs. To determine a client’s basis in his traditional IRAs, therefore, theoretically, you need only look at his most recent Form 8606. Whether everyone who is supposed to file this form has actually done so, and has completed the form accurately, and can find the forms he filed, is another question. While Form 8606 is the most convenient way to keep track of basis, the participant can establish that he has basis via other evidence even if Form 8606 was not filed or cannot be located. An inherited IRA ( ¶ 4.2.01 ) is subject to various additional or different income tax considerations, though IRS publications, tax forms, and instructions do not always make that clear. See, in addition to this section, ¶ 2.1.07 (D) (effect of plan loan at participant’s death), ¶ 4.2 (rollovers and plan-to-plan transfers of inherited plans), and ¶ 4.6 (income in respect of a decedent). For authority for the following statements, see Rev. Proc. 89-52, 1989-2 CB 632, § 3.01. See also IRS Publication 590-B (2016), Distributions from Individual Retirement Arrangements (IRAs), “What if you inherit an IRA?,” “IRA with basis,” p. 5. If the deceased participant had after-tax money in his IRA, the beneficiary takes over that basis after the participant’s death. This statement would appear to hold true even if the account is worth less than the participant’s basis as of the date of death; § 1014(b) (applicable for deaths in years before and after 2010), providing for an adjustment bringing basis to date-of-death value, does not apply to “income in respect of a decedent” (IRD; see ¶ 4.6 ). § 1014(c) . For deaths in 2010, see ¶ 4.3.08 . Beneficiary’s basis in an inherited IRA