Dear Mr. Slott,
In 2013, my husband was offered a buyout from his employer, Ford Motor Co. He had been retired since 1999 and so was already receiving a monthly pension check. (My husband had been diagnosed with Alzheimer’s Disease in 2011 and then passed away last November 2017.)
In 2013, knowing that his life expectancy was shortened by the disease and still being able to make these kinds of decisions at that time, he chose to take the lump sum.
A small part of his monthly pension check was not taxable because he had contributed after tax dollars to it while working. But when the discussion came as to how to take his after tax money from a lump sum payout – Ford decided that they would give him two checks but advised that both should go into a Traditional IRA.
Quite frankly I forget how the process went but my husband was so adamant that he was not going to pay taxes on these funds twice that he went ahead and put the largest taxable portion of the funds into a Traditional IRA (prox $386k) and the small after-tax payout ($13k) into a Roth IRA. We also were very aware that Ford was not a good source for tax advice.
My husband kept these funds in entirely separate IRAs – never commingling them with any other IRA funds.
I, as his spouse, was named as the only beneficiary.
These accounts are now in my name and I have still been keeping them entirely separate from any of my own IRA accounts.
MY QUESTION: Can I now commingle these assets with my other IRAs – both Traditional and Roth?
Mary – By splitting the funds into Traditional and Roth IRAs, your husband made the right choice. Assuming you are over age 59½, it is a good idea to combine your husband’s IRA and Roth IRA accounts with your own accounts. The main reason for doing this is simplicity. There are fewer accounts to track and manage, you might save on account fees if you have fewer accounts, and it makes things easier for your beneficiaries when they inherit the IRA accounts. Additionally, you can take a distribution without worrying about the 10% early withdrawal penalty.
I have basis in my IRA; I file an 8606. I am over 70½ and want to do a qualified charitable contribution for part of my required minimum distribution. How do I record what is taxable and what is not taxable? Do I have to report it on a prorate basis or can I choose what amount is a qualified charitable contribution?
Peter – The rules for qualified charitable distributions (QCDs) say that only pre-tax funds in your IRA can be used for a QCD. Assuming that the only distribution during the year is the QCD, on your Form 8606 the total value of your IRA will change each year, but the amount of after-tax funds in the account will remain the same. If you do a QCD and take additional funds that are payable to you, the amount payable to you will be subject to the pro-rata rule.
Part of the distribution payable to you will be taxable and part will be after-tax funds. The calculation is done on Form 8606 and excludes the QCD amount from the distribution amount for calculating the pro-rata formula. If your tax return is done on a computer, either by you or by a tax preparer, Form 8606 should automatically be produced as part of your tax return. If you use a tax preparer, be sure to tell him what the amount of your QCD is so that it can be excluded from your income. The IRA custodian does not report the QCD amount to IRS. You must do that on your tax return. The total amount distributed to you from your IRAs goes on line 15a of Form 1040, Any taxable amount paid to you goes on line 15b with the notation QCD to explain the difference in the two amounts.