Taxes on Non-spousal Inherited Roth
Last April (2010), I convinced my 82 year old father-in-law to convert at least part of his traditional IRA into a Roth and designate my 26ish year old daughters as beneficiaries. Unfortunately, he died a few months later. My questions relate to my daughter’s distributions.
1. When is their required beginning date for distributions? The broker at Ameriprise tells me it is Dec. 2012 while I see it as Dec. 31, 2011.
2. I understand from Mr. Slott’s book that the name on the Inherited IRA must stay the same. If this is so, how do we get it transferred to my daughters’ account(s)?
3. Since he did not hold the Roth for five years, will they be taxed on the RMDs?
Thank you.
Permalink Submitted by Alan Spross on Sun, 2011-10-09 19:42
1. When is their required beginning date for distributions? The broker at Ameriprise tells me it is Dec. 2012 while I see it as Dec. 31, 2011.
Assuming his death was in 2010, their first RMD must be taken out by 12/31/2011. It would be a year later if he passed in 2011.
2. I understand from Mr. Slott’s book that the name on the Inherited IRA must stay the same. If this is so, how do we get it transferred to my daughters’ account(s)?
Both names should appear on the inherited Roth IRA. For example, “Jane Doe, as beneficiary of Howard Smith”. Each custodian may require a slightly different format and all is OK as long as both names are shown and which is the decedent. Daughter’s SSN goes on the account.
3. Since he did not hold the Roth for five years, will they be taxed on the RMDs?
Not if they limit distributions to RMDs and perhaps some additional amount before 1/1/2015, when the entire inherited Roth becomes qualified and tax free. Until then, amounts from regular and conversion contributions come out first tax and penalty free. Each daughter must know their share of these amounts in order to report distributions on Form 8606. They will be tax free unless they distribute so much that earnings come out, but the distributions still must be reported. If this was FIL’s first and only Roth IRA, then the balance is almost all conversion dollars with minimal earnings and you know the amount of the conversion so there will not need to be much research in order to properly report the RMDs or other distributions. After 2014, an 8606 is no longer needed and distributions go directly on line 15a only of Form 1040.
You did not mention conversion taxes, but since he passed in 2010, his entire conversion must be reported in 2010. Taxes cannot be deferred to 2011 and 2012. Also, he should have taken his 2010 RMD before converting to a Roth, but since there was a conversion, his 2010 RMD was taken even if it ended up in the Roth. If that is the case, there is an excess contribution in the Roths that needs to be corrected. If you need further clarification on this, please advise.
Permalink Submitted by Stuart Lewis on Sun, 2011-10-09 20:47
Thanks for this information (especially on a Sunday) – it is very helpful. The decedent did take his RMD on his regular IRA prior to making the conversion. I did not understand what you meant about the over-funding of the Roth. I also was under the impression that one could make the conversion to a Roth in 2010 and pay the taxes equally in 2011 and 2012.
Permalink Submitted by mk foss on Sun, 2011-10-09 20:55
If the decedent took his 2010 RMD before the Roth conversion, there is no overfunding of the Roth.
The ability to pay the tax in 2011/2012 is only available to individuals ALIVE in 2011 and 2012. Alan has correctly stated that the conversion must be taxed on the 2010 return if he died in 2010. The executor has the ability to rechacterize all or part of the conversion by October 17, 2011. That reduces the 2010 tax but many not be in accord with the desires of the decedent.
Permalink Submitted by Stuart Lewis on Mon, 2011-10-10 20:01
Thanks for the clarification.