Inherited Roth rules
My wife’s father passed recently and left her a Roth. The Roth was converted from a traditional IRA in 2010, so of course taxes were paid.
She is the beneficiary of the Roth. She is 55 years old. She would like to liquidate the accounts and get cash to pay debts – not looking to prolong the life of the Roth IRA.
Can she withdraw this now penalty free? I get conflicting information on the 5 year rule and if/how it relates to a death as a special withdrawal exception.
Thanks!
Permalink Submitted by Alan Spross on Wed, 2012-05-09 22:39
There is never a penalty on a death benefit, but there would be income tax on any earnings, ie the amount that exceeds the converted amount until 5 years have passed from the year of his first Roth IRA. If the 2010 conversion was his first Roth, then any earnings on the conversion will not be tax free until 2015.
Also, are you sure the conversion taxes have been paid? Most 2010 conversion income is reported equally in 2011 and 2012, rather than in 2010.
Permalink Submitted by Steve Kent on Thu, 2012-05-10 02:45
Yes, the taxes have been paid. He had virtually no other income so we just did it all at once rather than stretch it out.
Now, what is the best way to carry this out? Close the account? If the earnings need to stay for 5 years can a separate account be opened for them? These is about $5000 gain on a current balance of $68,000.
The strange thing here is no one really knows – the trust lawyer, the Edward Jones rep, my tax accountant – you get the idea! You are the only person who has stepped up. Thank you!
Is this info on the IRS site? I could not find it.
Thanks again!
Permalink Submitted by Alan Spross on Thu, 2012-05-10 02:59
Taxation of Roth beneficiary distributions is covered on p 66 of Pub 590.
Assuming that this conversion was his first and only Roth IRA, your wife could take out up to 63,000 tax free. Amounts in excess of that, the 5,000 of earnings would be taxable unless she waits until 2015 to distribute the earnings. But she can take out up to 63,000 anytime she wishes without tax. Moving the 5,000 to a separate Roth IRA would not change the taxation, but if she wants to change custodians she must do it by a direct trustee transfer.
If she leaves the 5,000 in until 2015 she will also meet her RMD requirements under the 5 year rule. Using the 5 year rule she does not have to take out anything until 2017, but the account must be drained by the end of 2017.
If he had any other Roth IRAs besides this one, they must all be combined to determine the taxation of distributions.