Inherited Roth Taxation
I have a client that inheritited a Roth IRA in 2003.
This Beneficiary is a non spouse.
The Beneficiary started drawing income off it in 2006.
The Beneficiary drew $ 1350 out in 2009.
Is this 100% taxable?
If not how do you determine the tax?
Permalink Submitted by Alan Spross on Tue, 2010-04-06 23:20
We only know that any distributions after 2007 will be qualified and tax free because we know the 5 year holding period has been met. But the client needs to know what year the decedent first opened a Roth IRA. If prior to 2003, then the 5 years is up sooner since the 5 year period runs while the owner OR the beneficiary holds the account.
We also know that RMDs should have started in 2004 and if the Roth has not yet met the 5 year holding period, those RMDs come from regular contributions first, conversions second and earnings last. This means there is a good chance that these RMDs will be tax free since the RMDs will not be enough to exhaust all the contributed amounts.
For 2006 are you saying that this inherited Roth was still not qualified AND the beneficiary has gone through all the contribution balances?
By 2009 we know that the account has to be qualified since it obviously has now met the 5 year holding period so all distributions are tax free.
In summary, a few things are certain from what you posted, but some are not and depend on the other facts. These other facts also determine how the client should have reported distributions they started taking in 2003 or later. Client needs first to determine what year the decedent first contributed to a Roth IRA.
Permalink Submitted by tomd37 on Tue, 2010-04-06 23:22
Bright,
Distributions from qualified Roth IRAs are not taxable. The dollars that funded the Roth IRA were after-tax dollars. Otherwise, that would be double taxation.
Permalink Submitted by mk foss on Wed, 2010-04-07 03:07
If the IRA was inherited due to the death of the original owner in 2003, the nonspouse beneficiary is supposed to either use life expectancy or the five-year rule for withdrawals. Since no distributions were taken in 2004 or 2005 – life expectancy was not elected. The last date for the five-year rule was 12/31/2008. Roth IRA distributions are subject to the 50% penalty for failure to withdraw even though there is no income tax.
I think he should withdraw everything from the account as soon as possible and ask IRS to waive the 50% penalty because he apparently was not given good advice about the rules.
Permalink Submitted by Jeffrey Bright on Wed, 2010-04-07 10:51
These are very diferent and conflicting answers to this Roth question.
If the benificiary pulls the entire balance from the Roth the question is still what would be the tax.
Permalink Submitted by mk foss on Wed, 2010-04-07 16:48
Since it’s been more than 5 years since the original owner died, there would be no income tax if it were closed down now. Penalty taxes are the only concern.
Permalink Submitted by Alan Spross on Wed, 2010-04-07 22:10
I think any inconsistency lies in our interpretation of what you meant by “the beneficiary started drawing income off it in 2006”.
Does this mean that the beneficiary did not take any RMDs until 2006?
Or does it mean that 2006 was the year that all the Roth contribution amounts had been withdrawn and therefore the beneficiary was tapping the earnings?
There are two different questions here. FIrst is RMD compliance, and second is the taxation of distributions that HAVE been taken. For the taxation question, we need to know the year the decedent first contributed to a Roth IRA. That is when the 5 year clock started to determine WHEN the account became qualified.