Roth IRA when owner dies

Technical topics regarding tax preparation.
#1
Nilodop  
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Assume these facts. Real numbers are larger.
Roth IRA owned by X. Contributions were 100. Income left in Roth 10. Value of Roth at date of death 200. Was pwned more than 5 years. Value declines and Roth liquidates and beneficiary receives 150k.

Is the following correct?
No income tax to the Roth.
No income tax to the beneficiary.
Value in estate tax return 200.
Tax basis to beneficiary 200.
Capital loss to beneficiary (50).
 

#2
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No cap loss Misc itemized 2% deduction
 

#3
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TAXMASTER wrote:No cap loss Misc itemized 2% deduction


I thought the TCJA eliminated that deduction and it would not be available for 2022.
 

#4
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Nilodop wrote:Contributions were 100.
Is the following correct?

Tax basis to beneficiary 200.
.


From memory, there is no date of death basis adjustment for tax deferred accounts including Roth IRAs.
basis is 100 IMO.
 

#5
Nilodop  
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OK, so it's either a misc. itemized deduction (X does itemize) that is not allowed currently, or no loss at all (no step-up), per EstatesAndMore. Appreciate the replies and would appreciate learning which one it is.
 

#6
HowardS  
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No stepup.
Basis in an inherited IRA is the decedent's basis.
Retired, no salvage value.
 

#7
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Nilodop wrote:OK, so it's either a misc. itemized deduction (X does itemize) that is not allowed currently, or no loss at all (no step-up), per EstatesAndMore. Appreciate the replies and would appreciate learning which one it is.


IMO, Basis is 100 not nothing at all. At best that can be deducted is miscellaneous itemized deduction subject to 2% floor limited by the basis. However after 2017 IMO, not deductible.
 

#8
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In rereading, I agree basis is $100. Received $150, so no loss. But even if there was a loss, it is no longer deductible.
 

#9
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Might be a 2% deduction to many states (only).
 

#10
Nilodop  
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This is becoming quite a learning process for me.

OK, so no step-up at death, but beneficiary gets owner's basis of 100? And no basis for the income of 10 that's in the Roth? If owner distributes the 10 (not in liquidation) he pays no tax on it, and when owner dies the beneficiary (of his estate, same person who's beneficiary of the Roth) gets tha basis of 10. Then beneficiary liquidates Roth and receives, say, 150 in FMV of Roth assets, which he sells immediately for 150. Does beneficiary have a taxable gain of 50? Kind of odd if so, because the Roth could have stayed alive after owner died and distributed the 150 tax-free as regular Roth distributions, right? Or sold the assets at 150 with no tax, right? Or not right?

In summary, does a distribution in liquidation at a gain get taxed, even though regularn distrbutions are tax-free? Something doesn't foot.

What are the law or other citations that tell us how this works?
 

#11
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Not sure exactly what you are asking. However last time I checked successor beneficiary(s) receive the same basis as the original owner of the IRA.

Nilodop wrote:
What are the law or other citations that tell us how this works?


Maybe Code § 1014(c) and Code § 691 will help.
 

#12
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In your case, since the ROTH has been open over five years, all distributions will be qualified distributions and non-taxable if the beneficiary withdraws. See Section 408A(d)(2).
 

#13
Nilodop  
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I'm aware of 691/IRD. But I was "guessing" the Roth might be treated differently. It's not. So any excess of the value of the Roth that is distributed (either normally or in liquidation) to either the owner or the beneficiary is IRD, but not taxable, right? Even if it's a gain on sale of Roth assets after liquidation, but only up to their value at date of distribution.

Now, I'm told there is a misc. itemized deduction (in years when there is such a thing) for any loss on liquidation. Is that because it's a loss in respect of a decedent?
 

#14
Nilodop  
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Thanks all. It's indeed a learning experience.

Is my last post above correct?
 

#15
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Nilodop wrote:Thanks all. It's indeed a learning experience.

Is my last post above correct?


I’m not sure I understand exactly what is being asked. Originally I got the impression you’re trying to figure out a way to deduct a loss from an investment contained inside the Roth IRA.
If this is case, before 2017:
I don’t believe you can cherry pick investments, rather all Roth IRA accounts must be closed and the calculation of loss would be determined on the aggregate of all investments of all Roth assists from the Basis of the original owner. Off hand, I would say Roth IRA and Inherited Roth IRA would be treated separately so would not require to close the non inherited Roth accounts. You would need to verify. To take the loss deduction it would be an itemized deduction.

After 2017, the deduction above is no longer available.

Further, your question about excess value distribution: not sure I follow. Normally when I hear this I relate it to the owner made unallowable contributions to an IRA. If this was done and not rectified before the owner passed, it gets complicated to correct.

Finally, if your asking about in-kind distribution:
The taxation of the in-kind distribution will follow the same tax principles of a Roth IRA cash distribution.
 

#16
Nilodop  
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I’m not sure I understand exactly what is being asked.. I used to think I asked clear questions. My self-confidence is shattered!

... all Roth IRA accounts must be closed .... There's but one, and it'd be closed.

To take the loss deduction it would be an itemized deduction.

After 2017, the deduction above is no longer available.
. I tried to express that I wanted to assume that the misc. itemized deduction gets restored in the year of my hypothetical example. Here's what I said above. Now, I'm told there is a misc. itemized deduction (in years when there is such a thing) for any loss on liquidation. Is that because it's a loss in respect of a decedent?.

And all I'm now asking for is the cite for the misc. itemized deduction in such years. To keep the example simple, say the Roth contribution was 100, we are past the 5 years, owner is over 59-1/2, value declines to 40, owner liquidates at a loss of 60. Is that a misc. itemized deduction after 2025, as the law now stands? Whether or not the owner dies before the distribution.
 

#17
Nilodop  
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Bump.

And all I'm now asking for is the cite for the misc. itemized deduction in such years. To keep the example simple, say the Roth contribution was 100, we are past the 5 years, owner is over 59-1/2, value declines to 40, owner liquidates at a loss of 60. Is that a misc. itemized deduction after 2025, as the law now stands? Whether or not the owner dies before the distribution.

Articles and blogs say this loss deduction on liquidation of IRA was (before 2018) a misc itemized deduction, subject to the 2% floor. It must be true. I just don't know where that law or rule is written.

Speculation on my part: It's a loss on a transaction entered into for profit but not a loss on a capita asset, so misc. itemized is where it has to fit. Is that it?
 

#18
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See 2017 publication 529, bottom of page 8, last line. Can’t tell you the code section.
https://www.irs.gov/pub/irs-prior/p529--2017.pdf
 

#19
Nilodop  
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Thanks, Seaside CPA. Even though it has no cites, at least it's from IRS. And we pretty much know the cites upon reading the Pub. Here's what I see.

These other expenses include the following items.
***
Loss on traditional IRAs or Roth IRAs, when all amounts have been distributed to you.


But up above, as an introduction, it says:

You can deduct certain other expenses as miscellaneous itemized deductions subject to the 2%-of-adjus- ted-gross-income limit. On Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 9, you can de- duct the ordinary and necessary expenses that you pay:
1. To produce or collect income that must be included in your gross income;
2. To manage, conserve, or maintain property held for producing such income;


Then at the end of the list it refers us to this:

If the expenses you pay produce income that is only parti- ally taxable, see Tax-Exempt Income Expenses, later, un- der Nondeductible Expenses.


Which in turn includes this:

You can't deduct expenses to produce tax-exempt in- come.


So now I wonder about a loss on liquidating a Roth IRA.
 

#20
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Many don’t like relying on irs publications even if they support their stance. Irs stance in 2017 get any clearer than this?
Loss on IRA
If you have a loss on your traditional IRA (or Roth IRA) in- vestment, you can deduct the loss as a miscellaneous itemized deduction subject to the 2% limit, but only when all the amounts in all your traditional IRA (or Roth IRA) ac- counts have been distributed to you and the total distribu- tions are less than your unrecovered basis. For more in- formation, see Pub. 590-B, Distributions from Individual Retirement Arrangements (IRAs).
. From the publication linked above.

As for what happens at the end of 2025, not into what ifs. Who knows what congress will do.

As for the other statements and cites, here is a case.

https://casetext.com/case/fish-v-commr-2

Are you planing on holding on to this account hoping for a deduction?
 

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