Q: I recently inherited a regular IRA and a Roth IRA from my mother. I’ve heard something about a 10-year rule for my future distributions. But, I’m confused about how it all works from a tax standpoint for these two inherited accounts. Can you explain it?
A: The fact that your mom had already started taking her RMDs makes the rules a bit more complex. But, overall, it’s not too bad.
For your Inherited IRA, you will have to take annual distributions based on your age, not your mom’s age. In addition, you also have to fully distribute the entire account by the end of the 10th year, starting with the year following your mom’s passing. And, remember, your Inherited IRA distribution will be taxable income.
Things are treated a little differently with your Inherited Roth IRA. First, there’s no requirement to do annual distributions. But, the 10-year rule still exists. You just have to empty out your Inherited Roth by the end of that 10th year. Finally, assuming your mom’s Roth IRA was started at least five years ago, your Inherited Roth distributions will be tax-free.
The difference in tax treatment between these two inherited accounts is important to understand. Your Inherited IRA distributions will increase your taxable income. Your Inherited Roth IRA distributions won’t.
Depending on the size of your inheritance, you might want to spread out your Inherited IRA distributions to manage your tax picture. Of course, for your Inherited Roth IRA, you should let that account grow tax-free for the full 10 years.
Q: I’ve always made cash donations, but a friend of mine recently told me I could donate some of my appreciated stocks instead. Why is that a better way?
A: Donating appreciated securities, like individual stocks or even mutual fund shares, has a couple of advantages over just donating cash.
To start, when you donate appreciated shares, you still get to deduct the current value of those gifted shares. If you donate $10,000 worth of stock, you can deduct that $10,000, just like you do with your cash gifts (assuming you itemize your deductions, that is.)
But, here’s the added tax benefit. When you give away appreciated shares, you get to avoid paying tax on any of those built-up capital gains. Let’s say you originally paid $3,000 for a stock that’s now worth $10,000. If you sold that stock and donated cash, you’d owe tax on that realized gain of $7,000. Donating those shares “in-kind” directly to the charity and letting them sell it as a non-profit results in no tax at all. It’s a win-win.
Before moving forward, be sure to call the charity to make sure they are able to accept donated shares. Most can. It’s a pretty easy process.