Non-Spouse Inherited BDA Roth IRA
Fact situation: An 82 year old decedent funded a Roth IRA with taxable distributions from their Rollover IRA for the two years prior to their death. The Roth IRA has now been distributed to four BDA (beneficiary designated accounts) Roth IRA’s for the four beneficiaries who are the decedent’s adult children. The four beneficiaries each wish to maintain their BDA Roth IRA for as long as possible so therefore they only want to withdraw their minimum required distributions.
Questions: Given that the decedent owner of the Roth IRA only funded the Roth for two years, will any of the earnings within the Roth from prior to distribution be taxable to the BDA Roth IRA beneficiaries if they only take an annual RMD? I am assuming that only taking RMD’s will only generate Roth principal (not income) distributions. Does the rule concerning first in first out as to Roth IRA principal contributions and distributions carryover to the non spouse beneficiaries? If so, does the rule concerning taxability of prior to death earnings from the Roth become irrelevant if beneficiaries maintain Roth status for the five year requirement?
Your responses to the above are most appreciated.
Permalink Submitted by Alan - IRA critic on Tue, 2017-04-11 17:32
SInce this inherited Roth will not be qualified for 3 more years, the Roth IRA distribution ordering rules will continue for each beneficiary, with earnings coming out last. Individual conversion holding periods are not applicable. As you expected, as long as any beneficiary does not withdraw much larger amounts than their annual RMD, the RMDs will be non taxable since they are coming from the conversion balance. However, the beneficiaries still need to file an 8606 each year until the 5 years is completed, so they will each need to determine their share of the inherited Roth conversion basis for line 24 of the 8606. Apparently, there is no regular contribution basis. They also need to make a note as to when the 5 years has been completed. It started on 1/1 of the year in which the first Roth conversion was completed.