taxes on nonspouseal roth ira,s
I read an article in the Des Moines Sunday Register Dated 7/22/2012 . It stated an inherited nonspousal Roth IRA when distributed over ones life expectancy the ” contributions” are tax free however the earnings will not be tax free and will be taxed. I have never heard this before. Is this true?
Permalink Submitted by Alan Spross on Fri, 2012-07-27 23:56
No, it is completely false.
A non spouse inherited Roth IRA becomes qualified in the same time frame as it would have had the owner lived. The 5 year holding period is measured from the year the owner first made Roth IRA contributions (to any Roth, not necessarily the inherited one). The 5 year clock continues to run after the owner’s passing. Once the 5 year holding period has been attained, the inherited Roth is fully qualified and completely tax free.
Before the time the Roth becomes qualified, contributions come out before earnings. Therefore, in almost all cases a non spouse beneficiary taking annual RMDs will attain the 5 year holding period before the RMDs exhaust the amount of Roth contributions and begin to tap earnings. In those cases, the Roth beneficiary would not owe any income taxes on distributions.
Form 8606 would still be required to report distributions until the Roth becomes qualified. After that, the gross distribution is reported on line 15a and with -0- on 15b of Form 1040, and no 8606 needed.
Obviously, the above means that the Roth beneficiary needs to find out some basic information from the decedent’s estate to be in a position to know how to report RMDs and other distributions. If the Roth custodian indicates that they have held the Roth for at least 5 years, that would simplify things and eliminate the need to dig deeper.