beneficiary of Roth IRA conversion
My client passed away 2 years after he created a Roth IRA by conversion. Since he did not have the Roth IRA for 5 years, do his beneficiaries have to pay taxes on the gains in the Roth IRA account they inherited?
Of course, if there are no gains, I would presume they could inherit the money tax free in a lump sum, since my client already paid the taxes on the money, correct?
Thank you,
Deborah
Permalink Submitted by mk foss on Fri, 2009-02-13 18:28
The 5 year rule for avoiding income tax on Roth earnings is still in place in rhe situation that you describe. However, it is often not a problem due to the ordering rules on Roth distributions.
The first thing to come out of the Roth are the contributions (which were not deducted when they went in), second is conversion procedds (the tax has been paid on these funds as well), finally you get to the income or appreciation. Unless the Roth is cashed all at once before the end of the 5th year, in most situations no income is taxable.
Permalink Submitted by Al Fry on Sat, 2009-02-14 04:49
Unless the funds are desperately needed, it normally would be foolish to cash in an inherited Roth. This can be a valuable long-range tax-free investment vehicle, depending on investment and market recovery.