Inherited Non-Spousal Roth IRA RMD
I need some help. My daughter inherited a Roth IRA from her brother who passed away December 29, [b]2008[/b]. Under normal circumstances she would have had to take a RMD in 2009, however that requirement was waived for 2009. As the law now stands (and most likely not being changed) she will have to take her 2010 RMD based on the 12/31/2009 account balance.
Now to my question about the life expectancy factor to be used. She is 37 years old as of 12/31/2009. Had she been required to take a RMD in 2009 my thinking is the factor would have been 46.5 (using IRS Pub 590, Table I) and that she would have divided the 12/31/2008 balance by the factor 46.5 to obtain the 2009 RMD. I believe she subtracts 1.0 from the original factor each succeeding year and thus will divide the 12/31/2009 Roth IRA balance by 45.5 to determine the 2010 RMD. The process of subtracting 1.0 each year will continue each year to determine the new factor.
Is my thinking and calculation correct? Also, since it is a Roth IRA based on already-taxed investment dollars, no federal taxes are incurred. She lives in NC and I don’t know their tax laws right now pertaining to RMDs from a Roth IRA. Are there any federal tax forms required to be completed for her 2010 tax return in a little over 14 months from now? Her brother’s Roth IRA was originally established in 1999 with contributions in succeeding years.
Thanks for any help you can provide.
Permalink Submitted by mk foss on Mon, 2009-12-28 22:48
Hello Tom:
Your thinking is absolutely correct. The 12/31/09 balance is used and the factor is determined by your daughter’s age in 2009 – from the single life table – and reduced by 1.0 for the 2010 factor. Since the account was established in 1999, there will be no income taxes. However, if she fails to take a distribution she would be subject to the 50% penalty unless she has a good reason that would allow IRS to waive the penalty.
She will receive From 1099R for the distribution and she will have to explain on her return that it is not taxable. Since I do all of these things by computer now – I can’t tell you the exact procedure but I do have clients receiving distributions from inherited Roth IRAs and it works out fine. I also have a client who didn’t tell me that they had a 1099R from an inherited Roth IRA – they received an inquiry from IRS about it. It was easy to resolve with one letter – but it’s much better to handle things on the original return.
Permalink Submitted by tomd37 on Tue, 2009-12-29 14:05
Thanks Mary Kay for the response. Wishing you and others here a very happy new year!
Permalink Submitted by Terry Koch on Fri, 2010-01-01 20:50
[quote=”[email protected]“]Hello Tom:
Your thinking is absolutely correct. The 12/31/09 balance is used and the factor is determined by your daughter’s age in 2009 – from the single life table – and reduced by 1.0 for the 2010 factor. [u]Since the account was established in 1999, there will be no income taxes[/u]. However, if she fails to take a distribution she would be subject to the 50% penalty unless she has a good reason that would allow IRS to waive the penalty.
She will receive From 1099R for the distribution and she will have to explain on her return that it is not taxable. Since I do all of these things by computer now – I can’t tell you the exact procedure but I do have clients receiving distributions from inherited Roth IRAs and it works out fine. I also have a client who didn’t tell me that they had a 1099R from an inherited Roth IRA – they received an inquiry from IRS about it. It was easy to resolve with one letter – but it’s much better to handle things on the original return.[/quote]
Why does the establishment of the account in 1999 have any bearing on there being no income taxes? According to Pub. 590, pg 67, a distribution to a beneficiary is a qualified distribuion and thus not subject to income taxes. So no matter when the account was set up, the distribution would not be taxable? Is this correct?
Permalink Submitted by Alan Spross on Fri, 2010-01-01 22:50
No, that is not correct.
Per page 67 of Pub 590, there is TWO requirements for a qualified distribution. Both 1. and 2. are required. The first is completion of a 5 year holding period starting with the year of the first Roth contribution. As of 1/1/2010 Roths first started after 2005 do not yet meet this requirement.
The second requirement lists 4 other requirements, and only one of them is required in addition to the 5 year holding period above. Here is where you saw item (c), “made to a beneficiary….”.
A post death distribution does eliminate any early withdrawal penalties, but after all contributions have been removed tax free by the beneficiary, the earnings come out. These earnings would be taxable, but not subject to penalty. 1999 only has significance because it is well beyond the 5 year holding requirement.
Permalink Submitted by Charles Saylor on Sat, 2010-01-02 16:27
If the brother passed away in 2009, I thought under normal circumstances the daughter would not have to take a RMD until the year following his death (2010) and since she would be 38 in 2010, the factor for 2010 would be 45.6 (not 45.5). Is my thinking wrong?
Permalink Submitted by tomd37 on Sat, 2010-01-02 17:19
My apologies to all. 😳 Our son passed away on December 29, 2008 not as I originally posted as 2009. I will see if I can correct the original post. Thanks for the catch.
Permalink Submitted by Charles Hackett on Tue, 2010-01-05 19:44
Alan,
You mentioned TWO requirements on pg 67 of Pub 590. This Roth was started in 1999 and meets the 5 year rule. It also meets 2 (c), therefore appears to be a “qualified distribution.” The deceased owner’s sister inherits his Roth and begins taking RMD’s when she is supposed to.
You said, “A post death distribution does eliminate any early withdrawal penalties, but after all contributions have been removed tax free by the beneficiary, the earnings come out. These earnings would be taxable…” I must be missing something here. I assume the earnings are taxable because of the contributions (and would not apply if it were a converted Roth.) But are earnings on contributions always taxable? Your response would be greatly appreciated.
Permalink Submitted by Alan Spross on Wed, 2010-01-06 00:06
In that post I was replying to the statement that it did not matter when the account was set up, the earnings would be tax free to a beneficiary. But it does matter, since the 5 year holding period must be satisfied by a combination of the original owner and the beneficiary before the distribution is qualified.
To summarize, if earnings come out before the 5 year holding period is satisfied, they are taxable. Once the 5 year holding period has been satisfied all distributions are qualified and therefore tax free. Whether the first Roth contribution was a regular or conversion contribution does not matter.
A beneficiary that limits their distributions to the RMD amount will almost always complete the 5 years prior to hitting earnings. The exception would be someone who withdrew their regular and conversion contributions while living and then passed leaving only earnings in the Roth. In that case, the beneficiary’s first RMD or other withdrawal would be earnings and they would be taxable if the first contribution was less than 5 years prior to the distribution.
Permalink Submitted by Marvin Rotenberg on Tue, 2010-01-26 22:28
Your math and understanding of the rules are absolutely correct. Since it is a Roth IRA the distributions will have to be taken however they will be tax free from federal taxes. I’m not sure about state taxes for NC.
Marvin