Does the 5-year clock apply?
My dad passed away in April 2020 at the age of 92. When he died, my mom inherited his Roth IRA, and she assumed ownership of the IRA (in her name) with myself and my 4 siblings as designated beneficiaries. She then passed away in July 2020 at the age of 88. Her Roth IRA was separated into 5 inherited IRAs in her name for myself & my siblings as beneficiaries. Since my mom never had a Roth IRA prior to inheriting my dad’s IRA, does the 5-year clock apply to her Roth IRA that was established in 2020 or did she also inherit the original establishment date from my dad’s IRA? If the 5-year clock does apply, how does that impact the tax status of the funds in the 5 inherited IRAs that we now have? Can we take the money out-tax free and penalty-free at any time over the 10 years (10 year rule, current interpretation-pending IRS final rules)? Two of my siblings and myself are over 59.5; the other two are under 59.5.
Permalink Submitted by Alan - IRA critic on Thu, 2021-04-15 17:41
When a spouse assumes ownership of an inherited spousal IRA, the 5 year holding period is the longer that either spouse held a Roth IRA. Therefore, if your dad first contributed to a Roth by either regular or conversion contributions prior to 2017, the inherited Roth is qualified and the entire balance is tax and penalty free.
For any of you that are not disabled, the 10 year rule applies to your inherited Roth accounts under the Secure Act. The inherited IRAs must be drained by 12/31/2030. However, the IRS just shocked all the experts by indicating in IRS Pub 590 B that these inherited IRAs will also have annual RMDs. Before rushing to distribute a 2021 RMD, wait until later in the year to see if this Publication is correct or not. If it turns out correct, you each must take an annual 2021 inherited IRA RMD using your individual ages attained in 2021. If the Pub is corrected, then because distributions are non taxable, you might wait until the last year to allow more time to generate tax free earnings in the inherited Roth accounts.
Permalink Submitted by Greg Lanchman on Thu, 2021-04-15 17:49
Thank you!