Primary Beneficiary vs Contingent Beneficiaries
I may be reading too deeply into the definition of a spouse as a “sole” beneficiary, but I wanted to ask to be clear. My Dad is my Mom’s sole “primary” beneficiary for her Roth IRA. But Mom also designated her 3 children as contingent beneficiaries after Dad. Does Dad still qualify for all the advantages of just transferring Mom’s Roth IRA funds into his own Roth IRA?
And related – any reason to *not* combine the 2 Roth IRAs into 1 Roth IRA? Both just have cash and do not invest in anything but CDs.
Permalink Submitted by Alan - IRA critic on Thu, 2022-02-03 22:37
Dad is still treated as the sole beneficiary unless he were to disclaim some portion to allow it to pass to the children.
Electing to assume ownership means that her Roth would be treated as if it were his all along. As his own Roth IRA, if he were to need distributions of non qualified earnings from the Roth (non qualified because he was not yet 59.5), he would owe tax and penalty on the amount of earnings. The earnings would only come out under the Roth ordering rules after he had already distributed the contributions and conversions.
Conversely, if he maintained the inherited Roth as such until he was 59.5, any distributions would be penalty free since they would be coded as death benefits. They would also be tax free as qualified distributions once 5 years had passed from the year of Mom’s first Roth contribution.
If Dad already has a Roth and it is qualified, the simple solution is to roll the inherited Roth into his own Roth and the total will be qualified.
Permalink Submitted by Amar Patel on Thu, 2022-02-03 23:40
Thanks! Mom and Dad both had Roth IRAs open since 2012 at least. Dad will be 81 this year. Mom was just shy of turning 75 before she passed away late last year. So it sounds like just transferring funds from Mom’s Roth IRA into Dad’s Roth IRA is the simplest and best way to go.No need to mess around with “inherited IRAs” or have an account for Dad that states he inherited it from Mom, etc.? Any other reason that Dad would want to consider for keeping the funds from Mom’s Roth IRA separate from his at this point?
Permalink Submitted by Alan - IRA critic on Thu, 2022-02-03 23:51
No reason not to combine into one owned Roth IRA for Dad. Yet another benefit of doing this is that it avoids beneficiary RMDs on the inherited Roth which would be due annually. If the inherited Roth ownership is assumed this year Dad will be treated as the owner for the entire year and will not have to take an inherited Roth RMD for 2022. The best way to handle the change in ownership is for him to first notify the custodian that he is assuming ownership of the inherited Roth, and that he then wants it to be directly transferred into his existing Roth IRA. These two transactions will not generate a 1099R and therefore do not count against the one rollover limit over a 12 month period.