Roth IRA with Estate as Sole Beneficiary
Decedent died in 2008 at age 80 with a $100,000 Roth IRA opened over 5 years ago. He has no spouse and his Estate is named as sole beneficiary. He has 2 sons who are named as beneficiaries of his Estate. My best reading of the law is that since an Estate is not a named beneficary, the Roth IRA must be fully distributed within 5 years after the year of death. This seems to be contrary to the result if it had been a Traditional IRA since IRS Pub 590, Page 37 says that if the decedent dies after beginning RMD’s the Estate is able to spread out the distributions over the decedent’s remaining life expectancy. Am I reading this correctly? Also, the two sons don’t need this money and would be just as happy to keep the Roth IRA open as long as possible
Permalink Submitted by Alan Spross on Fri, 2008-06-27 02:18
You have assessed the RMD impacts here correctly. Having an estate beneficiary is worse for a Roth IRA than a TIRA if the owner passes after the RBD because the 5 year rule will apply to the Roth instead of the decedent’s remaining life expectancy for a TIRA. The decedent would have to be 92 before the advantage switched over to the Roth beneficiary and the decedent’s remaining life expectancy dropped below 5 years.
However, keeping the estate open will not result in any expansion of the Roth RMD period vrs terminating the estate and having the Roth assigned to the two beneficiaries. They would have flexibility to take distributions as they needed them as long as the Roth was totally distributed by the end of the 5 th year following the owner’s death. Since the distributions will be tax free, no reason not to wait until December of the final year to take any distributions from the Roth unless they need the funds.
Permalink Submitted by philip greenblatt on Fri, 2008-06-27 15:43
I am glad that I am on the right track. Something in your second paragraph is confusing me, however. I thought that the only option to maximize the tax savings was to keep the Roth “as is” for 5 years. Then, as you point out, distributions could be made to the Estate as beneficiary during the 5 year period if cash was needed. I am not sure what you mean by “terminating the estate and having the Roth assigned to the two beneficiaries.” Would that not mean that the Roth would be considered terminated upon the full distribution to the Estate and the Estate’s distribution of the $ upon its termination meaning that the $ is now in the 2 sons hands as “individual” $ with no further tax exemption? Did you mean to say that this last alternative is one that is not recommended since it will lose the tax exemption?
Permalink Submitted by Alan Spross on Fri, 2008-06-27 21:30
No.
The Roth provides the longest tax deferral by taking full advantage of the 5 year rule holding period. The affect of this is the same regardless of whether the estate remains open and takes the distribution or if the Roth is assigned to the beneficiaries upon closing the estate and then the beneficiaries take the distribution directly. Taxes are of course not an issue since the distribution will be tax free either way. And with the Roth being the only estate asset, there is no need to file a 1041.
But the assignment might provide the beneficiaries the ability to manage the investments for each of their shares independently in their own beneficiary Roth. In your jurisdiction termination of the estate may present too many technical problems and not be worth the effort. But if ending the estate and getting independent access to the account for each of them is viewed as an advantage, they might want to pursue assignment.
Here is an article describing this situation and possible solutions:
http://www.ataxplan.com/bulletinBoard/ira_providers.cfm