swongtax
Level 4

Hello Accountant Community, I have a question that I am having problems with interpreting the rules.

Backdoor ROTH and inherited IRA question:

My client has done a $6000 contribution to a non-deductible IRA and subsequently converted it to a ROTH IRA in order to accomplish the "Backdoor ROTH", but he also has an inherited IRA (non spousal). So in terms of pro-rata taxes (due to the pre-tax money in the inherited IRA), I have been reading that the inherited IRA has no affect and the ROTH conversion is a tax-free event as long as he has no other traditional, simple, SEP IRAs, etc.

1. Does anyone have the source in the tax code that shows that inherited IRAs (of whom you are the beneficiary) are not aggregated with your own personal IRAs?  

Below are some explanations that I found that may support that inherited IRAs are not included in the aggregation of your own IRAs when applying the pro-rata rule, but I am not sure if I am interpreting this correctly.  Furthermore, the inherited IRA is subjected to RMD each year, so the distribution will in effect decrease the tax basis of the Non-deductible IRA in the year of distribution and contribution, so when the non-ded IRA is converted, the tax basis decreases and will create a small taxable event on Form 8606 because the distribution was from a inherited pre-tax traditional IRA.

Publication 590 says:

Inherited from someone other than spouse.

If you inherit a traditional IRA from anyone other than your deceased spouse, you can't treat the inherited IRA as your own. This means that you can't make any contributions to
the IRA. It also means you can't roll over any amounts into
or out of the inherited IRA. However, you can make a
trustee-to-trustee transfer as long as the IRA into which
amounts are being moved is set up and maintained in the
name of the deceased IRA owner for the benefit of you as
beneficiary.

Like the original owner, you generally won't owe tax on
the assets in the IRA until you receive distributions from it.
You must begin receiving distributions from the IRA under
the rules for distributions that apply to beneficiaries.

 

Avoiding The IRA Aggregation Rule Via 401(k) And Other Employer Retirement Plans

While the IRA aggregation rule does combine together all IRA accounts to determine the tax purposes of a distribution or conversion, it’s important to note that the rule only aggregates together IRA accounts, and only the traditional IRA accounts for that individual.

Thus, a husband and wife’s IRA accounts are not aggregated together across the marital unit (although the husband still aggregates all the husband’s IRAs, and the wife aggregates all the wife’s IRAs). Nor are an individual’s own IRAs aggregated together with any inherited IRA accounts on his/her behalf. And any existing Roth IRAs – and the associated after-tax contributions that go into Roth accounts – are not aggregated either.

 

0 Cheers