Spouse Has New 5-year Period?
Husband dies leving his 5-year old Roth to his wife, who had no Roth of her own. She rolls the IRA to herself and dies two years later. Do the children benes have three more years before earnings are tax free?
Husband dies leving his 5-year old Roth to his wife, who had no Roth of her own. She rolls the IRA to herself and dies two years later. Do the children benes have three more years before earnings are tax free?
Permalink Submitted by Alan Spross on Thu, 2010-01-14 22:32
Roth beneficiary gets to add beneficiary time to decedent’s time to determine when the 5 year period is completed. In this case, the Roth was qualified upon decedent’s death for tax free earnings, and survivor does not have to start over whether they maintain the Roth as beneficiary OR assume ownership. Earnings will be tax free for the ultimate beneficiaries as well from day 1.
This is also a good case for RMD implications. Some IRA agreements automatically make a sole surviving spouse the Roth owner. But if not, the spouse could conceivably opt to remain beneficiary is they planned to drain the earnings BEFORE the Roth was qualified. That would eliminate any penalty on the earnings. While this does not sound very smart, many survivors need cash fast if their spouse passes. RMDs for a Roth are always based on death PRIOR to the RBD because there IS NO RBD. So if survivor wanted to maintain the Roth as inherited, RMDs would not begin until year the decedent would have reached 70.5. During this period, if the survivor passes, they are treated as the owner and that allows the children to get a full lifetime stretch. Alternately, if the survivor fails to take an RMD while living, the Roth default to ownership status and the children would still get the stretch.
In the more typical case where the survivor simply assumes ownership or the agreement makes this mandatory, the children would also get the full stretch.
Only case where the children would be treated as successor beneficiaries of the survivor would be if the survivor maintained inherited status for the Roth, and took RMDs as such, and then passed. In this case, the children would have to continue the RMD schedule of the surviving spouse instead of using their own life expectancies.
Permalink Submitted by charles lore on Sat, 2010-01-16 15:53
Allan as you said there is no RBD in a ROTH so and also there is no Required Distributions at age 70.5 So I am wondering why surving spouse must take distributors
when he would have been 70.5? Sure I know at Death there are required distributions but since in a ROTH the RBD concept gets thrown out why wouldnt the 70.5 concept be thrown out as well?
Permalink Submitted by Alan Spross on Sat, 2010-01-16 18:07
Hi, Chuck,
As you noted, there is no RMD for owned Roth accounts. However, if an inherited Roth is NOT rolled over or the agreement does not make ownership automatic, a surviving spouse COULD choose to maintain the Roth as inherited rather than owned for very limited reasons as outlined above.
IF the Roth remained in inherited status, then RMDs would be required, even for a surviving spouse just as if they were a non spouse. Those RMD rules would be the same as for an inherited TIRA when owner passed prior to the RBD. They would not have to begin until the decedent would have reached 70.5.
As indicated above, oone advantage here would be if the Roth was not yet qualified, but survivor wanted to drain it resulting in the earnings being taxable. If ownership was assumed the earnings would be penalized if survivor was not yet 59.5, but if the Roth was maintained as inherited, there would be NO early withdrawal penalty.
With the 2010 conversions, there will be some large Roths composed almost totally of 2010 conversions. In that case if the owner converted and then passed and the survivor became the owner and wanted to withdraw conversions, it would trigger the 10% penalty on conversions held less than 5 years since the conversions would be treated as if the surviving spouse made them. To avoid that penalty, the survivor could choose to register the account in inherited format if the agreement allowed it.