Inherited Roth 401k under age 59.5
I’m helping a young widow (under age 59.5) evaluate her options for her deceased husband’s Roth 401k. Her husband’s first contribution was over five years ago. She is in her 40s and needs the funds to pay off a high interest rate mortgage. Her CPA told me that the earnings on a Roth 401k distribution as the beneficiary would be subject to tax because she’s under 59.5. Can she roll this to an inherited IRA to avoid paying tax on the earnings?
Many thanks,
John
Permalink Submitted by Alan - IRA critic on Fri, 2024-04-12 16:35
The inherited Roth 401k is qualified if it has met the 5 year holding requirement since husband’s death replaces the age 59.5 requirement. Therefore, distributions from the inherited Roth 401k will be tax free. If she wants to do a direct rollover to a Roth IRA, it should be to an inherited Roth IRA to avoid the 10% penalty on subsequent earnings in the Roth IRA.
For either the inherited Roth 401k or inherited Roth IRA, she is a sole spousal beneficiary (EDB), so there are no RMDs required until the year husband would have reached his RMD age (probably age 75).
If husband’s Roth 401k has been held 5 years, but she rolls it over to an inherited Roth IRA, the amount rolled over is treated as regular contributions in the inherited Roth IRA, available anytime without tax or penalty. However, earnings generated in the inherited Roth IRA will be taxable until the inherited Roth IRA itself becomes qualified, but the amount of such earnings will be 0 to start and if she withdraws most of the balance, there will not be much in the way of earnings in the inherited Roth IRA.
She should probably give more thought if she will sell the house or wait until interest rates retreat and re finance it. She probably inherited a pre tax 401k balance as well……
Permalink Submitted by John O'Connor on Mon, 2024-04-15 18:03
Thank you. That’s extremely helpful.