WHAT ARE THE RULES FOR INHERITED ROTH IRA ACCOUNTS? A CLIENT RECENTLY PASSED AWAY – HE WAS IN HIS 70’S AND THE ROTH IS OVER 5 YEARS OLD. BENEFICIARIES ARE HIS ADULT KIDS – WHO ARE IN THEIR LATE 40 AND EARLY 50’S. HOW CAN THEY TAKE OUT THE FUNDS?
So, if the deceased owner is less than 59 1/2 and the Roth has been opened for at least 5 years, will the benefits still be tax free to the beneficiaires AND or if the owner is less than 59 1/2 and the Roth hasn’t been open for at least 5 years, what are the rules?
If the Roth had been opened for 5 years, the owner’s death replaces the age 59.5 requirement and the Roth is qualified. All beneficiary distributions are tax free. If the owner’s Roth had been held under 5 years, that clock continues to run including post death, so the beneficiaries will have a qualified Roth once the total time for both the owner and beneficiary equals 5 years. If the beneficiaries want a distribution prior to 5 years, the same ordering rules apply to taxation as they would have to the owner. Regular contributions come out first, then conversions tax and penalty free (even if under 5 years). So as long as they do not withdraw earnings until the Roth is qualified no taxes are due. But they will need to resurrect basis info in order to report those distributions on Form 8606 and many owners do not keep good records.
Permalink Submitted by Alan - IRA critic on Fri, 2021-02-05 17:19
His Roth IRA is qualified and tax free. Unless any child qualifies as an EDB (perhaps disabled), the 10 year rule will apply to the inherited Roth IRA accounts created for each one. Since the Roth generates tax free earnings, it is wise for the children to wait until the 10th year (2030 if death was in 2020, or 2031 if death is this year) to take a lump sum tax free distribution. Of course, they will have immediate access to any amount they need if they do not wish to wait the 10 years. There are no annual RMDs, just the 10 year max time limit. Their distributions are qualified and therefore Form 8606 is not needed to report them. Distributions go only on line 4a of Form 1040.
Permalink Submitted by Rene Nourse on Fri, 2021-02-05 21:00
Great! Thanks for the response.