Inherited Roth IRA to minors questions
When I pass, my minor niece and two nephews, ages 4, 7, and 10 now, will each inherit about $45,000 as beneficiaries of part of my qualified Roth IRA to support their educational needs. Am I correct in stating that any distributions from their inherited Roth IRA will not be subject to any Federal, Kiddie or State tax and there is no reason they would need to file any Tax Return? Fidelity has been my Roth IRA custodian for over 15 years so they should be aware that their distributions are tax free and annotate their yearly 1099R as such to the IRS. Their RMDs in the early years, before college, will be minimal. Their parents will be guardians of their UGMA/UTMAs. Is there anything that I or their parents should be aware of going forward and would require some action now to mitigate? Thank you so much for having this forum for us to ask questions. Frank M.
Permalink Submitted by Bruce Steiner on Sun, 2018-09-09 14:13
Permalink Submitted by Alan - IRA critic on Sun, 2018-09-09 16:04
Many custodians will not provide the Q code on the 1099R reporting Roth distributions, despite their own records showing that the 5 year holding period had been satisfied. If the gross distribution is large enough to require the minor to file along with any other income, the IRS will be looking for a tax return even though the distribution would only be reported on line 15 (now line 4) with no taxable income on 4b. The Q code MAY make it obvious to the IRS that there is no taxable income from the Roth distribution, whereas the T code would not be as conclusive. Therefore, if no return is filed the lack of the Q code means an IRS inquiry is more likely, although the IRS could inquire even with the Q code provided. It is possible to simply not file, then get ready to provide the documentation upon IRS request.
Permalink Submitted by Frank Miyamura on Mon, 2018-09-10 02:22
Thank you. I really appreciate your thoughtful comments. I will contact Fidelity tomorrow to ask if I should change my current Roth IRA beneficiary form to account for my minor age beneficiaries having UTMAs with a parent as guardian. I will also ask how Fidelity determines what code to place in IRS Form 1099R Box 7 for my beneficiary’s distributions from my qualified Roth IRA? I’ll pass on any helpful info to all of my Roth IRA beneficiaries. Thank you so much for your help.
Permalink Submitted by David Mertz on Tue, 2018-09-11 21:04
Fidelity might use code Q if the particular Roth IRA account that is inherited meets the 5-year rule on its own but, in cases where the account does not meet the 5-year rule on its own, I’m pretty confident that they will not look to other of the deceased’s Roth IRA accounts they hold or have held to determine if the 5-year rule has been met and will use code T. It will be interesting to hear what Fidelity tells you about that.
Permalink Submitted by Ben Meyer on Wed, 2018-09-12 03:48
Fidelity is a custodian that does not furnish a Q code for Roth distributions on owned Roth IRAs even when the account has been at Fidelity for more than 5 years. They say they don’t want the responsibility, presumably of affirming that the account holder is over 59 1/2.
Permalink Submitted by Alan - IRA critic on Wed, 2018-09-12 18:04
They rely on their age records for using code 7 on a TIRA distribution instead of code 1. It would make more sense if they stated their reason was that they have no way of knowing whether any prior contributions were not excess contributions or failed conversions (eg conversion of an RMD). That would be a true statement, but the reps may not be aware of the actual reason and might be fabricating their own reasons.
Permalink Submitted by Frank Miyamura on Sat, 2018-12-15 18:46
I’ve gotten some information that may be helpful for those, like me, who have a TIRA or Roth IRA with Fidelity and name minor children as designated primary beneficiaries. Fidelity will accept the child’s parent as the custodian of their child’s Fidelity Inherited IRA for a minor without major hurdles to overcome. A photo copy of the deceased certified death certificate, the child’s birth certificate which identifies him as a parent, the child’s social security number, an Inheritance tax waiver form, if required by the decedent’s state and standard information on the custodian is required during the application process. If someone other than a parent will act as custodian, then provide either – A certified copy of court appointment naming the guardian or conservator is required. Other finanacial institutions like Vanguard, Schwab, T Rowe Price, and Wells Fargo will also allow minors to own Inherited IRAs, but first check out the details involved. The IRA’s annual RMD’s, beginning the year after my death, can be automatically calculated and distributed by Fidelity on a date selected by the custodian each year and be directed to a Fidelity UTMA account opened for the child’s benefit by the custodian. Funds accumulated in it can be invested and using the account’s check writing feature, pay for the minor child’s expenses. For IRAs of modest amounts, this appears to be an inexpensive method of leaving a stretch IRA for a child until he reaches the age of majority in your state. Hopefully by then, his parent has instructed him on the benefits of maintaining his stretch IRA for as long as possible. For those with larger IRAs, trusts even with its added expenses, are appropriate to control the child’s funds past majority age. I was not able to clearly understand how Fidelity determines what 1099R Blk 7 code is used for what I believe are tax free distributions from the child’s Inerhited Roth IRA distributions each year so I’m just informing the parents that their child’s Inerited Roth IRA distributions are completely tax free because my Roth IRA was qualified. However, any income generated from the child’s UTMA is subject to taxes. Obviously, all distributions from TIRAs, without any basis, are totally taxable. The one thing I’ve learned most of all is that details matter when you are working with IRAs. Pitfalls are everywhere so you have to do your own research, learn the rules, ask lots of questions and seek help when needed. Thank you for having this forum for us to seek answers to our IRA questions. Also, thank you to everyone who has taken time to share their stories and expertise with us. You’ve helped me and it’s really appreciated. Frank