ROTH IRA BENEFICIARY TAX CONSEQUENCES
I am 57 old and have a ROTH IRA in my name. My spouse is 55 years old and the beneficiary of this account. My question pertains to the tax due and any applicable early withdrawal penalty of the ROTH funds by my spouse after my death. I opened my first ROTH in 2010 with a ROTH Conversion. I have converted funds from other accounts every year since then and have paid taxes on the converted amount when I filed my taxes the following year. I believe that the full balance of my ROTH account including earnings can be withdrawn tax and penalty free when I turn 59 1/2 because I opened my first ROTH several years ago and I will have met the 5 year holding period on all converted funds. If I were to pass away after turning 59 1/2 will my spouse be able to withdraw the ROTH funds tax and penalty free or would my spouse have to be 59 1/2 years old before she is able to withdrawal the ROTH funds with no tax or penalty? Also, would the 5 year holding period apply to my wife as the beneficiary of the ROTH? For example if my spouse became the beneficiary of my ROTH when she is 58 years old will she have to wait 5 years for the funds to be withdrawn tax and penalty free or will the holding period end when she becomes 59 1/2.
Thanks You!
Permalink Submitted by Alan - IRA critic on Fri, 2021-02-05 18:33
She can either maintain the inherited Roth as a beneficiary until she reaches 59.5 or elect to assume ownership. Results follow.
Maintain as beneficiary – The inherited Roth would be qualified and fully tax free. The 5 year holding period has been met by you and your death would replace reaching 59.5. Annual beneficiary RMDs would not need to start until the year you would have reached 72, but she would assume ownership prior to then.
Elect to assume ownership – The 5 year holding requirement has been met by you, but her age stands on it’s own. This means that her owned Roth would not be qualified until she reaches 59.5. Before that date, she can take distributions under the ordering rules with regular contributions you made coming out first, then your conversions in order of year. Conversions under 5 years would be subject to the 10% penalty if she reached those conversions.
Her best approach would therefore be to maintain the Roth as inherited if she inherits before 59.5, then assume ownership at 59.5 when the Roth will be qualified. This avoids any tax or penalty on distributions. IF she inherits after 59.5, she should elect ownership right away.
Permalink Submitted by Phillip Moore on Sun, 2021-02-07 17:51
Thanks for the clarification. I have another question relating to the same ROTH IRA account. Am I correct that converted amounts within the ROTH(not earnings) that have had taxes paid and has met the 5 year rule are eligible for immediate withdraw tax and penalty free even though I am under 59 1/2? If so and my wife inherited the ROTH account today would she be able to withdraw the same converted amounts only tax and penalty free immediately under the same guidelines although she is under 59 1/2?
Permalink Submitted by Alan - IRA critic on Sun, 2021-02-07 19:12
Yes, you are correct about distributing conversions at any age after they have aged 5 years. There is no tax or penalty due. As for an inherited Roth there is never a 10% penalty, so your death would immediately make all your conversions, even recent ones, available tax and penalty free.
However, if she were to elect ownership of the inherited Roth prior to 59.5, then the conversions done less than 5 years ago would be subject to penalty because the Roth is no longer treated as inherited. It would be her own Roth and your conversions are treated as if they were her conversions, and the 5 year conversion holding period would apply up until 59.5.