Basis step up of inherited Roth IRA accounts?
Hi,
Does the original contribution into a Roth account receive a step-up in basis upon the death of the owner? Or does the entire value of the account receive the step-up? Or no step up at all?
We have a client who is has inherited a Roth IRA from here spouse but can’t find the original basis but does have a total date of death value. She is not yet 59.5 yrs old but would like to take a distribution from the account.
Thanks!
Permalink Submitted by Alan - IRA critic on Thu, 2021-04-08 18:06
There is no date of death basis adjustment for tax deferred accounts including Roth IRAs. If her spouse first made a Roth contribution more than 5 years ago, his death resulted in the Roth account becoming qualified and entirely tax free as long as she keeps it titled as an inherited Roth. She will not need to take RMDs from the inherited Roth until the year her husband would have reached age 72, but if she wants to take voluntary distributions they will be tax and penalty free. If husband first contributed less than 5 years ago, any distributions of his Roth gains will be taxable.
When she reaches age 59.5, and assuming husband first contributed more than 5 years prior, she should elect to assume ownership of the inherited Roth, and it would be retitled with her as the owner, and it will be fully qualified and tax free. Perhaps she reaches 59.5 prior to the year he would have reached 72 and will therefore totally avoid RMDs.
Under this scenario she will not have to research what the Roth IRA basis is. The first thing she needs to do is determine the year he first contributed. Form 5498 is issued by the custodian for every year a contribution is made or conversion done if he converted. The Roth custodian should also know if they kept the same custodian. All she needs to do is locate some documentation that he contributed over 5 years ago. If he passed this year, any contribution done prior to 2017 will need the 5 year holding period.