Cashing out decedent ROTH
My client was 30 yrs old when he died. His brother, who is 32, inherited his ROTH. The ROTH was originally opened 11/10/06. Client died 8/1/07. Can the beneficiary cash out the ROTH without any penalties, if the basis is higher than current market value, due to market downturn?
Permalink Submitted by Al Fry on Wed, 2008-09-03 17:32
There would be no penalty anyway, since it is a death benefit. However if it under water, then there would be no tax, either, unless there is a death benefit higher than the cost basis.
Permalink Submitted by Alan Spross on Wed, 2008-09-03 18:02
Of course, it would not be wise to cash out the Roth under usual circumstances. These are funds that his brother had paid taxes on so that the Roth could generate tax free earnings. Cashing out would terminate that potential. However, note that there IS an RMD requirement, which is a very small % of the account that needs to be distributed before the end of this year.
Starting in 2011, the earnings would also be tax free and there might be earnings by then. For the RMDs till then, any earnings that would accrue would come out last and therefore all distributions should be tax free whether he stretches it, or as Al explained, cashes it out.