Roth IRA inherited by spouse under 59.5

Submitted by Harold Bridges on Thu, 2022-09-08 03:49

So, I am doing estate planning at the moment. I am 73 years old. My wife is 42 and will be the sole beneficiary of my Roth IRA.

If I were to die before she reaches the age of 59.5 and she were to take my Roth as the owner, not the beneficiary, would she be able to take out my contributions tax-free and penalty-free before she reaches 59.5? If so, what kind of documentation would be required to establish my Roth basis? 2021 was the first year I took a distribution from my Roth, which I did not report on Form 8606 since it was fully qualified, my having passed the age of 59.5. Both her Roth and mine have been open for more than 5 years.

Am I correct in understanding that I did not have to report my Roth distribution in 2021 on Form 8606?



Submitted by Alan - IRA critic on Thu, 2022-09-08 19:08

  • Well, you may have attempted to research this question, but there is limited guidance available for taxation considerations for the spousal rollover option of a qualified inherited Roth, and yours is qualified. Let’s first cover the option of her maintaining your qualified Roth as a beneficiary, at least until she is 59.5, as these regulations are clear.
  • As beneficiary of your inherited qualified Roth IRA, all of her distributions will be non taxable and without penalty, and she will not have to account for your basis or file an 8606 to report distributions. The only downside of this is that annual beneficiary RMDs will have to begin the year after your death using her single life expectancy from Table I each year. As a spousal beneficiary she does not reduce the divisor by 1.0 each year, she accesses the table each year for the new divisor. Under the Secure Act, she is an “eligible designated beneficiary” and therefore life expectancy RMDs apply until such time as she chooses to do the spousal rollover. If she will need to take distributions to cover living expense, these RMDs until 59.5 should not be a concern, since she would have taken distributions anyway.
  • Now to your question regarding her assumption of ownership of your inherited qualified Roth IRA. The IRS Regs are clear that this owned Roth IRA would not be qualified until she reaches 59.5, meaning that any earnings will be taxable if she takes out enough to tap earnings. She would also be subject to the 10% penalty since her age (not yours) applies. There are no RMDs. The issue that is less than clear is whether assuming ownership of your qualified Roth is any different than if your Roth was not yet qualified with respect to her basis in reporting distributions that she chooses to take. All the Regs say here is that basically her assumed Roth is treated as if it had been hers all along. That would require her to determine the amount of your regular contributions, and your conversions including the year of those conversions as she would have to file an 8606 each year to determine how much, if any, of any distributions are taxable or subject to the 10% penalty. Since your Roth has probably been qualified for several years, if you took distributions you did not have to file an 8606 as your distributions were qualified. Therefore, you would not have tracked your Roth basis any longer. Distributions she takes will use the Roth ordering rules, coming first from your regular contribution basis, then conversions (oldest first). If you did a conversion less than 5 years from the year she would tap that conversion, she would owe the penalty being under 59.5. Of course, it would be much easier if the entire Roth value at your death could be treated as regular Roth contributions for her, and therefore the first dollars she would withdraw tax and penalty free, but this intepretation does not seem supported by any Regs. Therefore, assuming ownership will avoid RMDs but comes with all these other complications.
  • All quite confusing, so if you have further questions, please post.

Submitted by Harold Bridges on Thu, 2022-09-08 23:53

In fact, this is immensely helpful.  I have indeed been frustrated in trying to understand the tax implications.  I hadn’t realized that if she were to take my Roth as inherited, then she could do a spousal rollover to her own Roth when she reaches 59.5 at which point she would no longer have RMDs.   Then the optimal strategy would be to take my Roth as inherited and my smaller IRA as owner.  Then she would not have to take RMDs from the IRA until her age 72.  She would have to take RMDs from the Roth, but only until age 59.5 and anyway, she will need the income.  Her Roth distributions would then always be tax and penalty free and she wouldn’t have to track my Roth basis.You wouldn’t by any chance be the Alan formerly of Fairmark, would you?

Submitted by Alan - IRA critic on Fri, 2022-09-09 00:20

Yes, same guy. If she elected to assume ownership of your TIRA, her only RMD prior to age 72 would be to complete your year of death RMD if you did not complete it. 

Add new comment

Log in or register to post comments