Roth Beneficiary Basis
I am trying to prepare a document for my wife (and beneficiary) outlining a plan of action should I pass. We are 46 and I have only one IRA which is a Roth with almost all of it being contribution/basis, all of which has met the 5 year rule for avoiding a pre 59.5 withdrawal penalty. I am interested to know what happens with her two options; rolling into her Roth vs. keeping it as an inherited Roth. My understanding is that if it were left as an inherited Roth she would have tax and penalty free access to all of it, basis and gains alike……correct? If she were to roll it into her Roth would she inherit my basis allowing her to withdraw up to that amount tax and penalty free pre 59.5? What about any gains in this scenario?
Permalink Submitted by Alan Spross on Thu, 2011-05-12 21:18
1) If you passed prior to 59.5, your Roth would be qualified because death replaces the age 59.5 requirement and you already have the 5 year holding period. If your spouse titled it as inherited the entire account would be tax and penalty free if she distributed it. She would not have to take RMDs until the year you would have reached 70.5. But check the agreement because some Roth agreements make a sole surviving spouse the automatic owner, eliminating the inherited option. If she intially titles it as inherited, she can assume ownership any time she wishes thereafter.
2) IF she assumes ownership or rolls it into her own Roth IRA, then your Roth is considered to have been hers all along, meaning that she has met the 5 year holding period, but the Roth is not yet qualified until she reaches 59.5. She could withdraw all of her or your regular contributions and conversions older than 5 years without tax or penalty. Conversions less than 5 years would be subject to penalty, and earnings which come out last would be subject to tax and penalty. Once she reaches 59.5, all her Roths are fully qualified.
So yes, she does inherit your basis and contribution dates just as if she had made them at the time. One vital notation to add is that she should name her own beneficiary ASAP. It would be a successor beneficiary if she maintained inherited status. She should not maintain the Roth as inherited beyond age 59.5 as would be no benefit for doing that.