RMD from inherited ROTH
My client was 31 when he died [b]last year[/b]. He had a ROTH IRA, which had his 33 year old brother as beneficiary and a 401K, which had his parents as 50/50 beneficiaries. The inherited IRA’s were set up [b]this year[/b].
In order to draw the proper RMD amounts, do the beneficiaries use 12/31/07 balance of the ROTH and 401K respectively?
Permalink Submitted by Alan Spross on Fri, 2008-07-18 23:43
Yes.
With respect to the taxation of the Roth RMD, it will need to be determined the year he first opened a Roth, and if it was not prior to 2004, the amount of regular and conversion contributions made to the account. This is necessary to determine if the Roth was qualified as of year end 2008 and if not, the figures needed to complete the 8606.
Likewise, the 401k may contain after tax contributions which will affect the taxation of distributions. But more importantly, the beneficiaries should determine if the plan will allow a transfer to an inherited IRA. This may be needed to escape the 5 year rule if it applies according to the plan document. Sounds like this may have been done since you indicated the inherited IRAs have been set up.
Permalink Submitted by [email protected] on Mon, 2008-07-21 18:24
Are you saying that if the ROTH has NOT been opened for 5 years, the proceeds (earnings) will be taxable? What’s coming out first? Principal or earnings?
Thanks.
Permalink Submitted by Al Fry on Mon, 2008-07-21 18:32
Principal comes out first.
Permalink Submitted by Alan Spross on Mon, 2008-07-21 20:36
Since the principal comes out first, as long as the beneficiary does not take large distributions, the 5 year period should be reached long before any taxable earnings are withdrawn. If he needed the funds, he could withdraw the amount of principal without tax, leaving enough principal to satisfy RMDs until the 5 year period was reached, and then take out the remaining earnings tax free.
Permalink Submitted by Robert Wright on Thu, 2008-07-24 21:28
So the Roth beneficiaries’ 5 year clock started when the IRA owner established the Roth account and the clock continues to move after the death of the IRA owner?
Permalink Submitted by Al Fry on Fri, 2008-07-25 02:37
That is correct.