Inheriting a Roth IRA

Submitted by BruceM on Tue, 2022-09-27 20:22

From the Feb 2022 IRS Proposed Regulations on distribution requirements for inherited IRAs, I have a question concerning inheriting a Roth IRA.

If the inheritor is a minor child EDB, then the old rules apply, correct? Meaning the minor may use the life expectancy rules with their life expectancy from Table I in the Appendix of Pub 590 with each year reducing the life expectancy divisor by 1. But the second option has always been the 5 year rule. Does that still apply for EDBs? I can’t imagine why anyone would want to use that…unless……the minor child is, say, age 19 at the death of the parent owner, the minor elects the 5 year rule, and then at 21 automatically switches to the required 10 year rule, so that no withdrawals were made and will not have to be made until the end of the year the child attains age 31. Is that possible?

My second question is just to confirm what Pub 590-B is not making clear. If the beneficiary is a DB who then names a successor and then the DB dies a couple of years later, the successor then steps in with a new 10 year rule regardless of many years the DB was the primary beneficiary as long as it was less than 10 when the DB died, correct? And this new 10 year rule will apply whether the success is a DB or EBD, correct?

Thanks

BruceM



Submitted by Alan - IRA critic on Wed, 2022-09-28 00:39

  • When there is a designated beneficiary, the 10 year rule has replaced the 5 year rule, and for deaths prior to RBD (all Roth owners pass prior to RBD) an EDB has the option to opt out of EDB treatment and into the 10 year rule. But if the custodian for the minor chooses that option, they are limiting the inherited IRA to 10 years with no annual RMDs, rather than very small LE RMDs to 21 plus 10 years to age 31. 
  • Q 2 – Not correct. When a DB subject to the 10 year rule passes, the successor only gets the remainder of that 10 year period. The successor does not get a new 10 year period. But when an EDB passes, the successor beneficiary does get a new 10 year rule period. For an inherited Roth, these beneficiaries can almost always avoid tapping earnings before the inherited Roth is qualified.
  • For an inherited TIRA, if the IRA owner passed after RBD, the IRS proposed Regs would require annual RMDs in years 1-9, and a successor beneficiary of a 10 year rule beneficiary would have to continue those RMDs using the DB’s LE schedule. The successor could never use their own LE whether the DB was taking RMDs under the 10 year rule or whether the DB was an EDB not subject to the 10 year rule. Several major retirement industry advocacy groups have submitted letters protesting some of these overly complex proposals submitted by the IRS. 

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