Distribution from Roth vs. Inherited Roth IRA
My daughter, age 37, wants to take a $1,500 distribution from one of her two Roth IRAs. Her regular Roth has been funded annually for more than five years. She inherited a Roth IRA from her recently (December 2008) deceased brother. Not sure how long he held his Roth IRA and therefore cannot confirm the age of contributions to it.
From a tax documentation and reporting point of view, would it be better for her to take the needed distribution from her regular Roth rather than from the inherited Roth? How will the 1099-R be coded (box 7) and how is the distribution reported on the Form 1040 other than on line 15a? That is, is there any other IRS form to be attached to her 2009 Form 1040 next year? Once she starts RMDs next year how is that distribution income reported other than on line 15a?
Permalink Submitted by Alan Spross on Sun, 2009-06-28 22:05
Tom, she should take the distribution from the inherited Roth, since this account will have to be drawn down by RMDs in any event. This allows her own Roth to grow, and she will never have to take RMDs from it.
From either account, the distribution this year will probably be tax free. The only way it would be taxable is if less than $1,500 in the respective account was from regular contributions, which always come out tax and penalty free. Her own Roth is not yet qualified, so if she uses that one, she will need an 8606, Part III to report it. The inherited Roth IS fully qualified IF your son made his first contribution prior to 2005, and if so, no 8606 is needed, just show the 1,500 on line 15a of Form 1040. If he made his first contribution after 2004, then the account is not yet qualified, and an 8606 will be needed, even though the distribution is probably tax free. She will need to get info on the inherited account anyway for next year, since RMDs will be due starting in 2010.
In order to secure this information, she should check with your son’s IRA records, possibly his tax records if he did a conversion, or with the IRA custodian if the account has been with the custodian for awhile. If he had his taxes done professionally, the tax preparer software should contain all IRA contribution information, so this is another source. If all else fails, a record of Form 5498 showing IRA contributions on your son’s record can be requested from the IRS, and that would show the date of the oldest contribution. If it does go back prior to 2005, then no further breakdown is needed between contributions and earnings to report the distributions. Obviously, the 5 year holding period will be attained sooner or later and after that no 8606 will be needed, since even earnings coming out of the inherited Roth then would be tax free.
Just for the record, she should keep a separate file on her own Roth showing the amount and year of each contribution and distribution, sort of a tally sheet. She will then have the info needed if she ever takes a distribution from her own Roth before age 59.5.