Inherited Non Spouse IRA Issue from 2016
My mother passed in mid 2016. She was 74. I inherited her Roth IRA.
In 2017, I took one single RMD and have not touched the account since.
My question is, what are my options now?
Since the death was before 2020, I don’t think the new Secure rules apply (10 years to drain).
It seems I was incorrectly told I would have to take out a lump sum option by the “end of the fifth year, after the year of death”.
This was not done yet.
Do I need to take RMD’s for the missed years and try to ask for a penalty waiver?
Can I still take a lump sum and close the account?
I want to finally rectify the situation and not cause any further IRS issues down the road.
thanks so much!!!
Permalink Submitted by Alan - IRA critic on Tue, 2022-03-29 22:32
You likely still have a choice. Since almost all Roth IRA agreements default to the life expectancy method, you should be able to restore your LE stretch by making up the missed RMDs for 2018, 2019, and 2021 and filing Form 5329 for each of those years to request the waiver of the penalty for reasonable cause. Be sure to correctly complete the 4 lines of each 5329 since that process is not intuitive. All your distributions will be non taxable.
Your other choice is to elect the 5 year rule instead. You still have that choice if the IRA agreement does not clearly state that you elected LE by taking the 2017 LE RMD. The 5 year rule became the 6 year rule when the CARES Act resulted in not counting 2020 as an RMD year, so you could still meet the 5 year rule by taking a total distribution by the end of 2022. While this would terminate your Roth IRA and end tax free earnings, you would avoid having to file any 5329 forms. This choice is probably only worthwhile if your Roth balance is quite small, and you no longer want to bother with annual RMDs.
Permalink Submitted by rube solomon on Wed, 2022-03-30 19:31
Thank you so much for your reply and answer. I believe the second option you mention would be best for me, as the amount of the IRA is less than 6 figures. And I was so happy to learn abot the “extra year” due to the 2020/CARES act, that has saved me!!Is this something I shoud have the help of a CPA or attorney with, or would it be feasible to handle on my own?Thanks again!!!
Permalink Submitted by Alan - IRA critic on Wed, 2022-03-30 21:12
If you opt for the second option, all you have to is request a total distribution from the inherited Roth IRA before year end. You will get a 1099R for 2022 that you will have to report directly on line 4a of Form 1040, but the distribution will be non taxable and you will not have to file any 5329 forms. That said, if the balance is high 5 figures, making up the 2018, 2019, 2021 and taking your 2022 RMDs would likely still leave roughly 85% of the current value intact to generate tax free gains for you with no annual tax reporting except for the annual tax free RMDs. Instead, unless you spend the money after taking a full distribution, you would probably invest it in a taxable account and have to pay annual taxes on any gains each year.
Permalink Submitted by rube solomon on Thu, 2022-03-31 17:22
Thank you.If I don’t take the lump sum option n 2022, would that mean an annual RMD based on my lifespan for the remaining funds would be the only option, until the funds are depleted? I have my own, seperate Roth IRA and I can always just use the funds from the lump sum of the inherited Roth and make maximum annual investments over the coming years into my own Roth IRA. There wouldn’t be any rule that would prohibit that, correct? Thank you
Permalink Submitted by Alan - IRA critic on Thu, 2022-03-31 18:08
You could always take out more than your annual RMD for the inherited Roth, just not less. This could vary from year to year. Amounts you withdraw can be used to make regular Roth IRA contributions to your owned Roth IRA or to pay taxes on Roth conversions. But you cannot roll over any inherited Roth IRA distribution to your own Roth IRA. You must qualify for regular Roth contributions by having earned income.
Permalink Submitted by Bruce Steiner on Sun, 2022-04-10 21:56
See PLR 200811028.
Permalink Submitted by rube solomon on Sun, 2023-10-15 00:46
Update- I took the final distribution in fall of 2022 and closed the account. As I finish my 2023 taxes this weekend, should i be reporting the amount on line 4-a on my form 1040??Is that the only reporting I have to do tax wise?thank you!
Permalink Submitted by Alan - IRA critic on Sun, 2023-10-15 01:54
That’s it. Just report the 2022 distribution on line 4a of Form 1040. No other forms needed.