Roth 401k Inherited

Submitted by Kevin O'Hearn on Fri, 2023-04-14 19:52

Hello,

A person with a Roth 401k passed away and left the assets to a non-spouse beneficiary. The decedent owned the Roth 401k for more than 5 years, but never had a Roth IRA at any point in their life.

1. Before the earnings portion can be distributed tax free to the beneficiary, does 5 years need to pass?

2. I don’t believe the 5 year participation in the Roth 401k by the decedent would pass through to the inherited Roth IRA, correct?

Any feedback would be greatly appreciated. Thank you.



Submitted by Alan - IRA critic on Fri, 2023-04-14 20:32

  1. The inherited Roth 401k is fully qualified with all distributions to the beneficiary tax free.  However, if a direct rollover is made to an inherited Roth IRA, earnings generated in the inherited Roth IRA after the rollover will be taxable until the inherited Roth IRA is held for 5 years. But beneficiary RMDs will come first from the inherited Roth basis and will be non taxable, although Form 8606 must be completed to report these distributions.
  2. Correct, but since the inherited Roth 401k is qualified, the entire amount of the rollover can be distributed from the inherited Roth IRA tax free.  Only earnings generated in the Roth IRA itself are subject to the 5 year holding period, therefore no part of the inherited Roth 401k balance will ever be taxable. 
  3. If the decedent passed after their RBD, the beneficiary will be responsible for completing the year of death RMD, which should be distributed by the plan and not included in the direct rollover. Note that 2023 is the final year that Roth 401ks are subject to RMDs per the Secure 2.0 Act.

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