Inherited Ira

Submitted by Nancy Boucher on Mon, 2017-04-03 20:48

The more I read the more confused I get. My father-in-law has been doing conversions form Tradition to Roth for the past 5 years. My husband is the primary beneficiary and plans to renounce his right and pass to the secondary beneficiaries (our 2 kids).
The 5 year rules are confusing. His first conversion was Jan 2012 so that piece is more than 5 years ago and appears will be totally tax-free.
Is there one 5 yr rule that he has met of does EACH conversion after the Roth account was set up have its own 5 year rule? (He rolled some each year since then).
If he dies before 5 yrs has gone by on any one conversion is that piece taxable to the kids? If so, then they would have some that is tax-free and some that is not? How would that be accounted for?
Thank you.



Submitted by Alan - IRA critic on Mon, 2017-04-03 21:43

  • Since the 5 year holding period has been met, after his death your children inherit the Roth and all their distributions including their RMDs will be tax free since his death replaces the requirement for him to reach 59.5.
  • However, all distributions your FIL takes before passing may include some taxes if he has not reached 59.5. His Roth becomes fully qualified at 59.5 and all individual conversions are deemed to have met the 5 year holding requirement at that time.
  • Your husband needs to file a qualified disclaimer with the Roth custodian within 9 months from his father’s DOD. He cannot simply renounce the Roth. The children will not have to report distributions on Form 8606, and their RMDs can go directly on Form 1040 even though they will not be taxed. Roth IRAs do not have RMDs for the owner, but non spouse beneficiaries will have annual RMDs required.
  • Make sure that the Roth custodian shows both the primary and contingent beneficiaries on the agreement. This should be periodically verified since IRA custodians occasionally make errors.

Submitted by Nancy Boucher on Tue, 2017-04-04 17:15

From following Ed slott’s materials, I always thought 5yrs from the opeing of the account was all we had to get to in order for all to be tax-free, but a friend showed me a document written by Bob Carlson that says “The 5 yr waiting period is a bit different for converted Roth IRAs.  Then, there is a separate waiting period for each conversion”Can an IRA expert explain which is true?Thanks much. N

Submitted by Alan - IRA critic on Tue, 2017-04-04 17:38

  • They are both true. There are two different 5 year holding periods for Roth IRAs with different purposes.
  • FIrst, there is a 5 year holding period for your Roth to be qualified which means the earnings become tax free. This is measured from the year of your first Roth contribution of any type. You must also be 59.5.
  • Second, there is a 5 year holding period for each conversion in order for that conversion to be withdrawn without a 10% penalty. All of these stop at age 59.5 if any are still open or at owner’s death.
  • So one type is for earnings to be tax free. The other is to avoid the 10% penalty on conversions.

Submitted by Nancy Boucher on Wed, 2017-04-05 04:24

Thank you

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