Inherited IRA Distribution and cost basis

Forum|Forum|1 year ago
May 3, 2024
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I took a distribution from an inherited IRA. Is my entire distribution taxable? Or do I need to know what the cost basis of each of the stocks I sold to take the distribution and record the difference between the two as income?

Best answer by dmertz

Investments within an IRA do not have a capital cost basis. The entire balance in the IRA is tax-deferred income and is entirely taxable when distributed unless the participant had basis in nondeductible traditional IRA contributions (which has nothing to do with the purchase price of any of the investments within the IRA). If the decedent had basis in nondeductible traditional IRA contributions, the basis would generally have been reported on Forms 8606 filed by the participant. Absent such evidence, the entire distribution is taxable.

dmertzAnswer

Employee

Opus 17

Employee

The whole point of any IRA is that the contributions are tax-deductible and the investments grow tax-free, so there is no basis and the entire amount is taxable as regular income. (Even though, with a regular broker account, you are only taxed on your gains and usually at a lower rate, IRAs still have a strong financial advantage in the long run.)

It is possible, but uncommon, for someone to contribute non-deductible funds to an IRA and have a partial basis that is not taxed on withdrawal. But to prove this to the IRS, you would have to have copies of form 8606 from the deceased's tax returns. Without that knowledge, you will assume that you have zero basis and the entire withdrawal is taxable.