INHERITED IRA RULE FOR CONTRIBUTING TO A ROTH
IF SOMEONE WOULD LIKE TO MAKE A ROTH CONTRIBUTION OR MAKE ROTH CONVERSIONS- AND THEY ARE BENEFICIARIES FOR INHERITED IRA ACCOUNTS, ARE THEY ELIGIBLE TO RECEIVE THE FULL TAX FREE GROWTH OF THEIR ROTH ACCOUNTS?
Permalink Submitted by Alan - IRA critic on Fri, 2021-05-21 16:08
The inherited Roth has no effect on an owned Roth IRA. Owned Roth accounts are subject to the same contribution rules and ordering rules for distributions regardless of inherited Roth accounts. Once qualified all gains are tax free. The same is true for the inherited Roth which becomes qualified 5 years after the first contribution made by the decedent and then all earnings would be tax free from the inherited Roth as well. No contributions can be made to an inherited Roth IRA itself unless the beneficiary is a surviving spouse who assumes ownership of the inherited Roth IRA.
Permalink Submitted by Rene Nourse on Fri, 2021-05-21 17:05
Sorry, that I wasn’t clear. The client has inherited traditional pre-tax IRA accounts – and wanted to be clear that if they have the rules for funding a Roth account will still allow them the opportunity to build out a tax free account and not be subject to the IRS rule which combines both traditional and Roth accounts.
Permalink Submitted by Alan - IRA critic on Fri, 2021-05-21 18:09
Regular Roth IRA contributions can still be made subject to the usual income limitations. I think the combined rule you are referring to is the 6000/7000 age 50 limit for TIRA and Roth IRA contributions combined, but the inherited TIRA would not affect this. Inheriting a TIRA does not constitute making a regular TIRA contribution, so like the earlier response, inheriting this TIRA should not affect making regular Roth contributions other than if a distribution from the inherited TIRA was large enough to cause the income limit for making Roth contributions to be exceeded.
Permalink Submitted by Rene Nourse on Fri, 2021-05-21 19:36
Got it- thanks. So, if their income is too high for funding a Roth- they can still do a back door conversion- which is what the clients wish to do.
Permalink Submitted by Alan - IRA critic on Fri, 2021-05-21 22:13
Yes, they could do a back door conversion of a non deductible TIRA contribution. The inherited IRA balance is not included in determining the total IRA balance on Form 8606, line 6, so it will not cause pro rating. However, any other TIRA, SEP, or SIMPLE IRA account balances owned by the client (not as a beneficiary) will cause pro rating of the conversion.