RMDs with non-qualified inherited Roth IRA

Submitted by David Purcell on Tue, 2023-04-25 15:01

My Mother died in Oct 2021. In the last two years of her life we converted her traditional IRA into a Roth IRA because she had massive medical expenses to offset the income generated by the conversion. My 2 sibs and I inherited 1/3rd each of the Roth IRA and set of inherited Roth IRA accounts at her brokerage. The value of the inherited Roths are about 10% higher than the taxed amount for the conversion. I know when we distribute we will have to pay tax on amounts above the basis at time we set up the accounts. If we invest do we also pay tax on all growth? In other words, is any of the growth in this non-qualified account tax free as it would be in a qualified Roth? Also getting conflicting advice re RMDs. I don’t think we have to do them based on reading various forum topics, but not sure if the non-qualified nature of the Roth changes that. My mom had no other retirement accounts.



Submitted by Alan - IRA critic on Tue, 2023-04-25 15:43

  • If her first Roth contribution was a conversion in 2020, the NQ Roth will become qualified in Jan, 2025, having met the 5 year holding requirement. You are likely subject to the 10 year rule, but there are no annual RMDs required in years 1-9 because Roth owners are treated as passing prior to their RBD as there is no RBD for Roth accounts. Therefore, the only requirement is that these inherited Roths be drained in 2031 with no annual RMDs before that year.
  • All growth in the inherited Roth accounts come out last for any distributions prior to 2025, therefore even prior to 2025 the inherited Roths can be tapped tax free up to the 1/3 (each beneficiary’s share) of the amount of the conversions, but these distributions must be reported on Form 8606, showing the 1/3 conversion basis amount on line 24.
  • SImply waiting until 2025 when these inherited Roth accounts are fully qualified and entirely tax free will eliminate the need to file Form 8606. The tax free distributions taken between 2025 and 2031 will only be entered on line 4a of Form 1040.
  • Therefore, even if distributions are taken prior to 2025, they should be non taxable unless a beneficiary pretty much drains their inherited Roth.

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