Roth IRA Conversion for a deceased party

Submitted by Matthew Morea on Wed, 2018-02-28 17:28

I have a client with a large Roth IRA. Her husband converted it in 2010 and paid the tax. He then deceased in 2015 and the wife inherited it in a spousal Roth IRA. Now the wife has deceased and the 3 children stand to inherit the Roth. I assume we can cut three checks and it will pass tax free to the 3 kids? That’s one question.

The other possibility is: Can we stretch the Roth IRA into 3 beneficiary Roths for the 3 kids? I think we still have to do RMDs but is this a good option? Thanks



Submitted by Alan - IRA critic on Wed, 2018-02-28 19:18

I assume that both spouses were over 70.5 when they died. But what did the wife do with the inherited Roth? Did she treat it as inherited and take RMDs as a beneficiary, or did she assume ownership and have it retitled in her name as owner? This affects the status of the Roth and also the stretch for the children.

Submitted by Matthew Morea on Thu, 2018-03-01 02:40

wife did not opt for inherited Ira. She transferred deceased spouses roth into her own Roth. 

Submitted by Alan - IRA critic on Thu, 2018-03-01 04:55

The inherited Roth IRA is fully qualified and all distributions will be tax free. If inherited IRAs for each child are established by the end of the year following the year of wife’s death, they can take life expectancy RMDs based on each of their ages at the end of that year. SInce the inherited Roth will continue to generate tax free earnings, it is best that they stretch it by taking out no more than the RMDs, although if they need to they can take out as much as they want. Any check payable to a beneficiary is not eligible for rollover, so the Roth custodian can only be changed by direct trustee transfer.

Submitted by Matthew Morea on Thu, 2018-03-01 16:49

Good advice. Appreciate it. I noticed yoiu said the inherited IRA needed to be established in the year following the parents death. In this case that was 2016. Nothing was set up due to estate issues. Does this mean its too late to go this route?

Submitted by Alan - IRA critic on Thu, 2018-03-01 17:09

Submitted by Matthew Morea on Thu, 2018-03-01 17:13

kids were named as beneficiaries. Children are all between 55 and 65 yrs old. It sounded like we had some kind of deadline there.

Submitted by Alan - IRA critic on Thu, 2018-03-01 17:38

Yes, with kids named on the IRA as beneficiaries and wife passed in 2016, then 12/31/2017 was the deadline to establish separate inherited IRA accounts so that each child could use their own life expectancy. While they can and should still request separate inherited Roth accounts, each will now have the same RMD divisor, that of the oldest. Further, it the 2017 beneficiary RMDs have not been distributed, they each need to make up that RMD and file Form 5329 to request that the penalty be waived. The IRS will probably approve the waiver.

Submitted by Matthew Morea on Fri, 2018-03-02 14:50

Just curious but since this is a ROth IRA why are there any RMDs at all since the taxes have been paid. I thought only traditional IRAs/Seps etc had RMDs. Thx

Submitted by Alan - IRA critic on Fri, 2018-03-02 15:39

Non spouse inherited Roth IRAs have RMDs. While almost all such RMDs are tax free, the intent is not to let an inherited Roth generate even more tax free gains for beneficiaries. The prime purpose of all retirement accounts is for the retirement of the account owner, not for the beneficiaries. Despite the beneficiary RMDs, if the beneficiary is young, the gains will exceed the RMDs for many years before the RMDs get larger.

Submitted by Matthew Morea on Fri, 2018-03-02 16:00

Outstanding thanks very much

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