ROTH IRA DISTRIBUTED TO NON-SPOUSE BENEFICIARIES

Submitted by Paul H Franson Jr on Sun, 2020-04-12 20:01

DAD 90 YEARS OF AGE PASSES AWAY IN DECEMBER 2019 WITH $100,000 VALUE IN A ROTH IRA. THE ROTH WAS A CONVERSION FROM A TRADITIONAL IRA – ROTH IRA WAS SET-UP IN AUGUST OF 2015 WHERE THE VALUE OF THE IRA AT THAT TIME WAS $60,000 – SO 5 YEARS WILL BE UP IN AUGUST OF 2018. CAN THE BENEFICIARIES TAKE THEIR DISTRIBUTIONS STRAIGHT TO A BROKERAGE ACCOUNT AND NOT HAVE TO OPEN AN INHERITED ROTH IRA ACCOUNT? SINCE THE 5 YEARS IS NOT UP – WILL THERE BE A PENALTY TO THE BENEFICIARIES FOR TAKING THE MONEY OUT? WILL THERE BE A TAX ON THE $40,000 OF GROWTH SINCE THE 5 YEARS IS NOT UP? SHOULD THE BENEFICIARIES JUST WAIT UNTIL AUGUST 2020 SO THAT THE 5 YEARS IS UP? THERE HAVE BEEN MANY DIFFERENT ANSWERS HERE FROM SEASONED PROFESSIONALS!



Submitted by Alan - IRA critic on Sun, 2020-04-12 20:42

  • Dad passed prior to the Secure Act, so these beneficiaries are entitled to a life expectancy stretch while the Roth continues to generate tax free earnings. So unless they have current expenses that cannot be met without distributing the inherited Roth, they should continue their separate inherited Roth IRAs.
  • In the event they want to take a full distribution anyway, the entire 100k balance will be tax free because the Roth became qualified at the end of 2019 (5 years runs from 1/1/2015 to 1/1/2020).
  • The custodian would probably want an inherited Roth to be established for each under their respective SSNs because must custodians systems limit a given account to one SSN (in this case Dad’s). So they would probably transfer their respective shares to separate inherited IRA accounts from which a full distribution could be made immediately. However, it still makes no sense that they would forfeit tax free gains with no reporting for a taxable account balance with reports of dividends and cap gains every year on their returns. If Dad had passed a month later, the Secure Act would have resulted in the 10 year rule, but even then consultants have recommended keeping the inherited Roth intact to the end of the 10 year period to take advantage of tax free gains generated in the account.
  • If they keep the inherited Roths, there are no beneficiary RMDs required in 2020 due to the CARES Act RMD waiver. Their first beneficiary RMD would not be due until the end of 2021.

Submitted by Paul H Franson Jr on Tue, 2020-04-14 21:01

Excellent – thank you – the conversion effective January -1, 2015 even though converted August 2015 – so we have the 5 year rule covered  for penalties and taxes – set-up ROTH IRA accounts for the beneficiaries as the money can grow tax free – delay the first RMD until 2021 due to CARES ACT.  A follow-up up question – what if the conversion was done August 2016 and we did not have the ROTH IRA set-up for 5 years – would we still be penalty and tax free as the Dad converted this money when he was 85 years old and paid all of the taxes and passed away in December 2019?  If taxes and penalties do apply would it help if the beneficiaries held on to the money in their own INHERITED ROTH IRA accounts and wait until January 01, 2021 for the 5 yerars to have elapsed before taking any distributions?  And finally, since the 5 years has actully elapsed – if the ROTH IRA is tax free for the IRS would that be the case as well for states like NY and CT?

Submitted by Alan - IRA critic on Wed, 2020-04-15 00:01

  • If his first Roth contribution was in 2016, then the Roth will not be qualified until 1/1/2021. Before that date any distribution up to the amount of the conversion will be tax and penalty free, but amounts in excess of the conversion (the earnings) will be taxable, but no penalty, and distributions would have to be reported on Form 8606, Part III.  If beneficiaries wait until 2021, the entire balance is tax free and no 8606 required.
  • Also tax free for all states income tax purposes.

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