Inherited Roth IRA information

Submitted by Rusty Bynum on Mon, 2016-08-08 20:13

Question 1: If a client inherits a Roth IRA from a parent, already held in an inherited Roth IRA account, do they have to withdraw money, and if so, what are the options for doing so?

Question 2: If the client must withdraw, would it make sense to deposit the money in a personal Roth IRA vs. an inherited IRA?



Submitted by Alan - IRA critic on Mon, 2016-08-08 20:46

  1. Client is a successor beneficiary on parent’s inherited Roth IRA and must continue the RMD schedule used by the parent. In order to determine the correct RMD divisor the client will have to determine the age of the parent at the end of the year after they inherited, look up that divisor in Table I and subtract 1.0 from that divisor for each year after the year of parent’s first RMD. If parent was using the 5 year rule, the client must also drain the inherited Roth by the end of that 5 year period.
  2. The RMD the client takes cannot be rolled over, but can be used to subsidize new retirement contributions to his own Roth retirement plans. Client could transfer the inherited Roth to a new custodian if there are reasons to do so, or could increase the distribution if he needed more money that just the RMD. However, in most cases since the inherited Roth grows tax free, client should not take out more than needed. There might be unique exceptions however.

Submitted by Ben Meyer on Tue, 2016-08-09 17:07

How would the RMD divisor for the child successor beneficiary be determined if the deceased parent was himself/herself the sole spousal beneficiary of the previous predeceased parent?  If the first of the two parents died before RBD?  If after RBD?  Is there a Code section or TR reference for this situation?

Submitted by Alan - IRA critic on Tue, 2016-08-09 17:58

  • Benn, since there is no RBD for a Roth IRA, all deaths are deemed to be prior to the RBD. This results in the 5 year rule being automatic if the Roth is left to an estate or non qualified trust. The 5 year rule in most Roth agreements is likely to be an elective for any designated beneficiary, with LE as the default provision. So Roth owner passes and leaves the Roth to surviving spouse. It has been written that every so often a Roth agreement will include a provision making any sole surviving spouse beneficiary the automatic owner, but this is not likely commonplace, so assume the surviving spouse actually took beneficiary RMDs on the inherited Roth. Surviving spouse then passes leaving an inherited Roth to the child. The child is treated as a successor beneficiary and not a designated beneficiary, so must continue the beneficiary RMD schedule of the designated beneficiary parent. The divisor is determined as in my prior post.
  • It is probably more likely in this example that the surviving spouse does nothing, and does not take any RMDs because someone told her that Roths do not have RMDs. In that case, the same rules as for TIRAs apply including the default rule where a sole surviving spouse misses a beneficiary RMD and thereby defaults to owning the inherited Roth. In that case, when the surviving spouse passes, the child will be a designated beneficiary and be able to use their own LE for their RMDs. Here is the IRS Reg on Roth RMDs:
  • (c)Distributions to a beneficiary that are not qualified distributions will be includible in the beneficiary‘s gross income according to the rules in A-4 of this section. (b) The minimum distribution rules apply to the Roth IRA as though the Roth IRA owner died before his or her required beginning date. Thus, generally, the entire interest in the Roth IRA must be distributed by the end of the fifth calendar year after the year of the owner‘s death unless the interest is payable to a designated beneficiary over a period not greater than that beneficiary‘s life expectancy and distribution commences before the end of the calendar year following the year of death. If the sole beneficiary is the decedent’s spouse, such spouse may delay distributions until the decedent would have attained age 70 1/2 or may treat the Roth IRA as his or her own.A-14. (a) No minimum distributions are required to be made from a Roth IRA under section 408(a)(6) and (b)(3) (which generally incorporate the provisions of section 401(a)(9)) while the owner is alive. The post-death minimum distributionrules under section 401(a)(9)(B) that apply to traditional IRAs, with the exception of the at-least-as-rapidly rule described in section 401(a)(9)(B)(i), also apply to Roth IRAs.  

Submitted by [email protected] on Wed, 2016-08-10 13:27

Dear Ed Slott, Thank you for your answers to the beginning of the forum, we had some additional questions about the answer to Question 1–(Question 1: If a client inherits a Roth IRA from a parent, already held in an inherited Roth IRA account, do they have to withdraw money, and if so, what are the options for doing so?).The additional question is below:Question 3–The client who has inherited the ROTH IRA from parent is in her early 40’s. Is it possible to use the new beneficiary’s single life expectancy or utilize the strechout IRA concept?The inherited Roth IRA is small, but we want to maximze the benefit to the client.Thanks for your clarification.

Submitted by Alan - IRA critic on Wed, 2016-08-10 15:23

If the parent had already inherited the Roth IRA and then passed, the parent is the designated beneficiary and the client is a successor beneficiary. The client cannot use their own life expectancy for RMDs, but must continue the RMD schedule of the parent. However, instead of simply determining the last divisor used by the parent which might have been incorrect, the client should check back to the year the parent began RMDs and their age at the end of that year. By doing that the client can be sure that the parent’s RMD schedule that client must continue to use is correct. In summar, the client does NOT get a new stretch period because he is only a successor beneficiary and the parent was the desigated beneficiary on whose life expectancy RMDs must continue to be based.

Submitted by tomd37 on Wed, 2016-08-10 15:36

Alan – I don’t know if edit corrections can be made, but in your first response the word “subect” should be changed to “subtract”.  I personally know that one (1) must be subtracted each year from the factor, but other readers may not realize that.  Tom D.

Submitted by Alan - IRA critic on Wed, 2016-08-10 18:03

Thanks, Tom. I edited it to subtract.

Submitted by Ben Meyer on Wed, 2016-08-10 19:56

Thanks, Alan for the detailed posting.  But there is still one case not covered in the above:  Roth owner whose age is under 70 1/2 passes and leaves the Roth to surviving spouse as sole beneficiciary.  Surviving spouse keeps the account as a beneficiary account, intending to take no distributions until the first deceased spouse would have reached age 70 1/2.  (The surviving spouse does not treat the Roth IRA as his or her own.)  But the surviving spouse passes before the deceased spouse would have reached 70 1/2.  Thus the IRA is not in distribution at the time that the surviving spouse passes.  The beneficiary of the surviving spouse is the child.  Under this situation, what distribution period does the child use for RMDs?   

Submitted by Alan - IRA critic on Wed, 2016-08-10 21:06

  • Benn, in this case the child will get a full LE stretch because RMDs for the surviving spouse have not yet begun.Therefore, the surviving spouse is treated as the employee or IRA owner. The applicable IRS Reg is 1.401(a)(9)-3 Q 5 as follows:
  • Q-5. If the employee’s surviving spouse is the employee’s sole designated beneficiary and such spouse dies after the employee, but before distributions have begun to the surviving spouse under section 401(a)(9)(B)(iii) and (iv), how is the employee’s interest to be distributed?
  • A-5. Pursuant to section 401(a)(9)(B)(iv)(II), if the surviving spouse is the employee’s sole designated beneficiary and dies after the employee, but before distributions to such spouse have begun under section 401(a)(9)(B)(iii) and (iv), the 5-year rule in section 401(a)(9)(B)(ii) and the life expectancy rule in section 401(a)(9)(B)(iii) are to be applied as if the surviving spouse were the employee. In applying this rule, the date of death of the surviving spouse shall be substituted for the date of death of the employee. However, in such case, the rules in section 401(a)(9)(B)(iv) are not available to the surviving spouse of the deceased employee’s surviving spouse.

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