Roth IRA
Client had Roth IRA for 2 years. Client passed away at age 56.
Son is the beneficiary on the account. Opening a beneficiary Roth IRA for the son. Because the original owner only had the Roth open for two years, do we have to treat this beneficiary Roth IRA different than if the original owner had the account open for at least 5 years? Anything different from a tax or RMD perspective?
Permalink Submitted by Alan - IRA critic on Fri, 2019-05-10 17:32
The son must take annual beneficiary RMDs, taxed under the ordering rules for Roth IRAs since the Roth is not qualified. It will become qualified after 5 years from the owner’s first contribution. Under the ordering rules, the first dollars distributed (whether RMD or more than the RMD) come from the regular contribution balance and will be non taxable. The son will have to determine what the basis is for the Roth IRA in order to report these distributions on Form 8606. After 3 years, the Roth will be qualified, completely tax free and Form 8606 will no longer be needed to report the distributions. Therefore, the major challenge is determining what the Roth basis amount is that was inherited, since most owners do not keep good records. This will probably take some research. Since the Roth was only open two years, the balance is probably mostly basis, but the son should not be guessing on the exact amount. The custodian may be able to help with the exact number since only two years of their records must be checked.