Beneficiary Roth IRA

Submitted by Wendy Mommaerts on Tue, 2018-01-16 17:34

I have a client who inherited and IRA and a Roth IRA from her brother. I was told that beneficiary Roth IRA’s have unique provisions that would require the assistance of a tax professional.

It was my understanding that we treat a non-spousal bene Roth just like a non-spousal bene Roth?



Submitted by Alan - IRA critic on Tue, 2018-01-16 18:18

  • The critical detail on the inherited Roth IRA is whether the decedent made their first Roth contribution at least 5 years ago or not and the tax professional cannot know that. If the 5 year holding period combining the decedent’s and the client’s ownership time has been completed, the inherited Roth is qualified and entirely tax free. So all the client need do is report the RMD distributions on line 15a of Form 1040. Very easy. 
  • If the Roth has not been held 5 years, distributions are non qualified until the 5 year clock is completed. In this case more work is required since a Form 8606 will be needed to report the RMDs or other distributions and the decedent’s basis will have to be determined. Often this is not easy because the 8606 first requires the regular contribution basis and if that does not cover the distributed amount, then the conversion basis. The 8606 can stop once the total holding period is 5 years. The tax pro will not do this research, but once the client has done it, reporting is easy so a tax pro would probably not be needed.
  • RMD divisors are the same as the inherited TIRA assuming both accounts had an identical history and separate inherited IRA accounts were established by the deadline. However, if the client inherited the Roth through the estate instead of directly, then the 5 year rule will apply to the inherited Roth. But the 5 year rule will apply to the traditional IRA ONLY if the decedent passed prior to his RBD.

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