Roth
My mother passed away dec 3, and I am wondering what to do with her IRA. How long do I have to make up my mind if I want to transfer it to my IRA. If I transfer it to my IRA, can I take it out later. We all have Roth IRa, and I am sole bene. I really do not want to liquidate, as it is down alot, and I want to wait for it to come back, bit I could also use the ,money.. Can someone give me some ideas on what can be done
Lee
Permalink Submitted by Anonymous (not verified) on Sun, 2009-02-22 03:54
Lee,
Sorry to hear of your loss.
The first thing you need to know is that you CANNOT transfer your inherited share of your mother’s IRA to your IRA. You also cannot take a distribution and roll it over to another inherited IRA, because a non spouse inherited IRA cannot be rolled over. Any distribution you take is irrevocably taxable.
Here is what you need to do – in order:
1) Submit a death certificate and provide whatever else the IRA custodian requires to re register this account in beneficiary form. This must include both of your names, eg “Lee Jones, as beneficiary of Mary Jones”. Also submit your own successor beneficiary, that is who you want to inherit the account if you should pass.
2) Once the account is re registered, if you do not want to deal with that custodian, you can still move the account to another IRA custodian, but ONLY by direct transfer, not by rollover. If your mother was subject to RMDs for 2008 and did not take her RMD, you must take out that RMD, and it will be taxable to you.
3) You will be required to take distributions over your life expectancy each year. Normally, this would start in 2009, the year following her death, but a new law signed by Bush on 12/23 waives 2009 RMDs (only). Therefore, your first RMD does not have to be taken until 12/31/2010. It will be based on your age as of 12/31/2009 and the account value of the IRA on that same date. There is no penalty on whatever distributions you take and no maximum on the amount you can take out, but you will owe taxes on the amount. There will be a penalty if you fail to take out your minimum starting next year.
4) Finally, you should check with your mother’s tax preparer and/or her records to determine if she ever made non deductible contributions to her IRA. Look for Form 8606 on her past tax records. If she made these contributions, a pro rated share of your distributions will be tax free, so check this out while her final return is being prepared.
Note: If your mother’s IRA was a Roth IRA, distributions will be partially or fully tax free. If this was a Roth, please advise.
Permalink Submitted by Anonymous (not verified) on Sun, 2009-02-22 20:54
It is a roth IRA, and she had not taken any distributions.
Why would it be Taxable?
Permalink Submitted by Anonymous (not verified) on Sun, 2009-02-22 22:20
If her IRA was a Roth, then distributions will be totally tax free, unless earnings are distributed before the account is 5 years old. The 5 years includes time held by both your mother and beneficiaries. Earnings come out last, so the first distributions will be tax free. You will have to find out the year her first Roth was opened. If it was prior to 2005, the account is qualified and totally tax free. If after 2004, then you will need to determine the amount of her regular and conversion contributions to determine how much you can take out before earnings are tapped.
Since this was a Roth IRA, your mother did have RMDs, however the beneficiaries will have to take RMDs per Note 3 above.
Permalink Submitted by Anonymous (not verified) on Sun, 2009-02-22 23:44
I believe her first IRA was 2003,or 2004. She never took out RMD
Is it possible to just let it sit there, and make up for losses.
The account is down about 50% of where it was last year, because of the economy.
Permalink Submitted by Anonymous (not verified) on Mon, 2009-02-23 00:26
Being the original owner of the ROTH IRA, your mother did not need to take the RMD or any distribution.
I am sure Allen S. meant to say, “your mother did NOT have RMDs,,,,” as a ROTH IRA does not require the original owner to take RMDs. A big advantage over a Traditional IRA.
In the second post in this thread, Alan S. correctly said you, as a beneficiary, would be required to take RMDs based on your life expectancy.
It sounds like the ROTH IRA is at least 5 years old. That is good because then all distributions are tax free.
I suggest you read Allen S.’s first post in this thread, print it out and follow the advice given there, step by step.
Permalink Submitted by Anonymous (not verified) on Mon, 2009-02-23 01:02
When a Roth Ira is inherited, distributions are still tax free. I was told that my children could inherit the Roth and let it keep earning profits and take them out tax free.
The following can be found at:
Income tax
The income tax treatment of a Roth IRA following death is the same as before death, with three exceptions:
* The 10% early distribution penalty generally does not apply to post-death distributions. (Note: it can apply to a spouse who elects to treat the Roth IRA as his or her own Roth IRA and subsequently takes a taxable distribution.)
* Beneficiaries can withdraw earnings tax-free, even if the beneficiary is under 59½ and the decedent was under 59½ — but only if the five-year requirement is satisfied.
* Beneficiaries may be required to take distributions according to rules described below.
One rule that does not change is the requirement for the Roth IRA to exist at least five years before earnings can be withdrawn tax-free. To be more precise, earnings can be withdrawn tax-free beginning on the first day of the fifth taxable year after the year the Roth IRA was established. That means January 1, 2013 for Roth IRAs established in 2008.
As a result, a beneficiary may have to pay tax on earnings withdrawals if the original owner’s death and the beneficiary’s withdrawal both occur shortly after the Roth IRA is established. This result isn’t as harsh as it may seem, however. The tax only applies to earnings that built up after the contribution to the Roth IRA. Normally that’s a small portion of the Roth IRA if the withdrawal occurs such a short time after the original owner established the Roth IRA. What’s more, a beneficiary can avoid this tax by leaving the earnings in the Roth IRA for the required amount of time — even if the beneficiary immediately withdraws everything except the earnings.
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And from the Motley Fool Site
And while estate taxes may have to be paid on the value of the Roth IRA upon your death, no part of the Roth IRA will be subject to income tax to your beneficiaries. This is completely different from a traditional IRA. The value of a traditional IRA will be included in your estate. But the traditional IRA earnings will also be taxed as income to your beneficiaries. This could cause a very large combined estate/income tax to be assessed against your traditional IRA. A Roth IRA can eliminate much of this tax burden because Roth earnings are not subject to income tax, either to you or to your heirs. This could be an enormous estate tax issue for many of you, and something that you should understand and implement into your estate tax planning.
Non-Spouse as Roth IRA Beneficiary
If you decide to have a non-spouse as your Roth IRA beneficiary, your rules will be a little different. When the beneficiary is not a spouse, that beneficiary must take the Roth IRA distributions:
1. By the end of the year containing the fifth anniversary of the account owner’s death; or
2. Over the life expectancy of the beneficiary, starting no later than Dec. 31 of the year following the year that the account owner died.
But this isn’t necessarily a bad thing. Think about it. Any distribution in the year that includes the fifth anniversary of the owner’s death would have to be made after the five-tax-year period restrictions on contributions/conversions had expired. Therefore, no part of the distribution would be included in the beneficiary’s income. So while the account must be eventually liquidated by the beneficiary, Uncle Sammy has allowed for a method by which, if the beneficiary does the right thing, none of the Roth IRA proceeds will be subject to tax or penalty. Of course, if the beneficiary is greedy and wants to take the Roth IRA distribution immediately after the death of the Roth IRA owner and before five tax-years have passed, there may be taxes to pay. So, in this case, patience is rewarded in the form of tax-free income.
On the other hand, if distributions are made over the life expectancy of the beneficiary starting no later than Dec. 31 of the year following the year in which the owner died, it is very possible that some of those distributions would be included in the beneficiary’s income. Why? Because the five-tax-year holding period may not have been met. But since distributions are treated as being made out of contributions first, the chances are that most distributions made before the end of the five-tax-year period would be made out of contributions, and would not be subject to tax.
But regardless of how the beneficiary decides to take the Roth IRA distributions, and regardless of the taxability of the distributions (if any), none of the distributions would be subject to the 10% early withdrawal penalty. If you go back and read the article on Roth IRA penalties, you’ll find that the death of the Roth IRA holder will avoid the 10% penalty on the beneficiary.