Roth IRA & Estate Taxes
I have a friend who has over $2M in his Roth IRA – he converted his 401k and Traditional IRAs to a Roth a few years back. His total estate is over $10M and he is not married. Assuming he passes away, is the $2M Roth IRA included in his estate for estate tax assessment purposes? If so, would an estate tax be assessed on the Roth since it is over the $5M exemption limit? If an estate tax is assessed on the Roth, he obviously won’t pay income tax on the distributions he takes but perhaps his beneficiaries could use his Roth to help pay for his estate tax. Thanks for any insight!
Permalink Submitted by Alan - IRA critic on Wed, 2014-02-26 15:39
Yes, his Roth IRA is included in his gross estate and subject to estate taxes. However, the income taxes he paid to convert to a Roth IRA are obviously no longer in his estate, so the conversions helped to reduce his gross estate. While Roth distributions will be income tax free to beneficiaries, it may not be best to use the Roth to pay all the estate taxes. If he had annuities or any other assets that are IRD (income in respect to decedent), taxes on those assets can be partially offset by a misc itemized deduction for the beneficiaries for the income taxes paid on IRD assets. See Pub 559.