Inheriting a Roth IRA opened less than 5 years ago
Hello
Have researched and have not been able to find an answer. If a client of ours inherits a Roth IRA from her mother that had been opened less than 5 years, will our client (the beneficiary) have to pay taxes on gains if liquidating upon inheritance? Or does the 5 year rule not apply upon death/ transferring to a non-spouse beneficiary.
Thank you!
Permalink Submitted by Alan - IRA critic on Wed, 2022-04-27 19:07
The 5 year holding period must be completed for the Roth to become qualified, but it runs continuously beyond the Roth owner’s death until it is reached. So if the mother’s first Roth contribution was in 2019, the inherited Roth will be qualified on 1/1/2024. Before 2024, the ordering rules will apply to distributions such that the contribution basis comes out first tax and penalty free. But the client would need to determine how much the contribution basis was in order to report a non qualified distribution on Form 8606. That may be difficult to determine. It is easier to hold off on distributions until the 5 years is completed, because Form 8606 and the basis amount would no longer be needed and the entire balance would be tax free. Since client will be subject to the 10 year rule with no annual RMDs, it would be beneficial to hold the inherited Roth to the end of the 10 year period to benefit from tax free earnings, and that will obviously meet the 5 year holding period as well.