Life and Death Planning for Retirement Benefits

Chapter 2: Income Tax Issues

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any such account is counted as part of the Distribution Amount. § 72(e)(2)(B) , (5)(A) , (5)(D)(iii) , and (8)(B) . However:  Inherited IRAs held as beneficiary are aggregated only with other inherited IRAs held as beneficiary of the same decedent; they are not aggregated with the individual’s own IRAs; see ¶ 2.2.07 .

Roth IRAs are not aggregated with traditional IRAs . § 408A(d)(4)(A) .

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 IRAs of husband and wife are not aggregated. Each spouse’s IRAs are aggregated only with other IRAs belonging to that spouse. See Notice 87-16, Part III, D7, and Instructions for IRS Form 8606 (2009), “Specific Instructions,” first paragraph (page 5), stating that Form 8606 is completed separately for each spouse. G. Cream-in-the-coffee formula: Examples. The following “Gibbs” and “Ted” examples illustrate the formula: Gibbs Example: Gibbs has $12,000 of nondeductible contributions in his traditional IRA at X Fund, which is now worth $30,000. He also has a traditional IRA worth $210,000 (as of the end of Year 1) at Y Fund. The larger IRA received no after-tax contributions; it contains only a rollover from a QRP maintained by Gibbs’s former employer, plus some deductible IRA contributions Gibbs made prior to 1987. He has no other IRAs. In Year 1, he cashes out the $30,000 IRA. He thinks that, because that particular account contains his $12,000 of after-tax contributions, he will be taxable on only $30,000 - $12,000, or $18,000. However, because of § 408(d)(2) , Gibbs’s $30,000 distribution is deemed to come proportionately from both of his IRAs, even though it actually came from only one of them. Here is how the cream-in-the-coffee fraction applies to Gibbs’s distribution: Distribution Amount: $30,000 Total Nondeductible Contributions: $12,000 Year-end Account Balance: $210,000 Outstanding Rollovers: zero Return of Basis = $30,000 X [$12,000 ÷ ($210,000 + $30,000)] = $1,500 The amount of gross income Gibbs must report is therefore $28,500 ($30,000 distribution minus $1,500 basis allocated to the distribution). His remaining basis in his traditional IRA is $10,500 ($12,000 total basis, less $1,500 used up in the Year 1 distribution). Ted Example: As of August 1, 2010, when he converts the entire account to a Roth IRA, Ted has $50,000 in his traditional IRA, $40,000 of which is after tax money. He never recharacterizes this conversion. On December 1, 2010, he retires from his job, and gets a distribution of $450,000 from his 401(k) plan, all of which is pretax money. He rolls the $450,000 into a traditional IRA on December 2, 2010. He makes no other contributions to (and receives no other distributions from) any traditional IRA in 2010. Ted thinks that he has made a Roth conversion that is only 20 percent ($10,000 ÷ $50,000) taxable, but his post-conversion rollover messes up the fraction. Here is how the cream-in-the-coffee fraction applies to Ted’s Roth IRA conversion: