Beneficiary of a Roth and funds have not been held in Roth for at least five years
Our client inherited her mother’s Roth and we learned the funds have not been held in the Roth for at least five years. It’s my understanding that the earnings on such funds will be taxable to our client. My question is, will the earnings ever be tax free?
Permalink Submitted by Alan - IRA critic on Tue, 2018-07-03 17:11
The earnings will be tax free at the end of the 5 year period starting 1/1 of the year her mother made her first Roth contribution. That is when the inherited Roth becomes qualified and fully tax free. Therefore, while the client may wish to stretch this inherited Roth which generates tax free earnings, all she has to do to prevent tax on the earnings is to only withdraw the amount of her mother’s contributions (either regular or conversion) prior the the year the inherited Roth becomes qualified. Her beneficiary RMDs before the Roth is qualified will almost always be small enough to consist only of contribution money, although she will have to determine the amount of her mother’s contributions in order to properly report the RMDs on Form 8606. This may take some research to determine unless her mother left good records. Form 5498 can be used if they were retained.