Withdrawals for Non-Spouse Beneficiary of Roth IRA
Are non-spouse beneficiaries of Roth IRAs forced to take rmd’s in the same manner as a non-spouse traditional IRA beneficiary or are they treated in same manner as original Roth IRA owner or spousal beneficiary where no rmd’s are required? If the non-spousal beneficiary of a Roth is required to take rmd’s, how are they taxed?
Permalink Submitted by Peter Lingane on Tue, 2012-01-17 16:27
The RMD rules for traditional and Roth IRAs are essentially the same after the death of the original participant: non spouses must begin RMDs while spouses have the option to claim the IRA as their own. The only distinction is that the Roth IRA owner is treated as having died before his or her required beginning date.
Distributions from a Roth IRA to a beneficiary are taxed in the same manner as to the original participant except that the age 59.5 requirement is waived because of the participant’s death. All distributions from a Roth IRA opened more than five years previously are tax free, basis is distributed before earnings and earnings are taxed before five years. All distributions are penalty free.
Distributions to a spouse who claims the Roth IRA as their own could be taxed and could be penalized before the spouse achieves age 59.5.
For the details, see IRS Publication 590.
Permalink Submitted by James Claiborne on Tue, 2012-01-17 18:34
Ok, great information. One thing I would like to clarify. You mentioned that Distributions from a Roth IRA to a beneficiary are taxed in the same manner as to the original participant except that the age 59.5 requirement is waived because of the participant’s death. Does this mean that when a non-spouse beneficiary begins to take rmd’s from an inherited Roth IRA(within 12 months of date of owner?? or year of??) are they taxed only on gain in the Roth? entire balance? or other?
Permalink Submitted by Alan Spross on Tue, 2012-01-17 18:44
If the beneficiary incurred any tax, it would only be on the earnings in the Roth IRA, and the earnings would come out last. That means that even if the Roth owner made his first contribution in the year of death, RMDs would not reach the earnings within 5 years, after which all distributions are tax free.
On the other hand, if the Roth was opened 4 years before death, it has some time to generate earnings, but then the beneficiary only has to wait one year until the Roth is fully qualified and tax free.
The typical case where a beneficiary would pay any tax whatsoever would be if the owner under 5 years withdrew most of their contributions before death leaving mostly earnings in the Roth when inherited. If the beneficiary then took a lump sum distribution before the 5 years was completed, then the beneficiary would have a largely taxable distribution. This would be a rare combination of events.
All beneficiary distributions should be coded with a 4 (death distribution) on the 1099R, and that eliminates any early withdrawal penalty.