Inheriting a Roth IRA that was converted less than 2 years ago

Submitted by Jeff Mitchell on Fri, 2023-09-15 16:02

We have a client’s daughter who received a payout from an annuity company where the mother had converted the roth less than 5 years ago (2 years ago to be exact). Upon the death claim, the annuity company is saying that the interest is taxable ($ made once the claim was filed) and the distribution from this account is also taxable. Is this correct?

The client had taken a check, not deposited yet and is wondering why this would be taxable since it is a roth.

If the client instead put the funds received into an inherited Roth IRA would this than help the distribution/interest from being taxable?

Thanks,



Submitted by Alan - IRA critic on Fri, 2023-09-15 16:29

  • A distribution to a non spouse beneficiary cannot be rolled over, and because this Roth IRA is not yet qualified the amount received in excess of what was contributed will be taxable. Roth gains are only tax free to beneficiaries if at least 5 years has passed from the year of the decedent’s first Roth contribution. If the daughter could find evidence that mother ever made a Roth contribution over 5 years ago (even if that Roth has since been closed or rolled over), then the 5 year requirement would be met. As is, daughter will have to report the distribution 1099R on Form 8606, showing  the mother’s conversion amount on line 24, and the 8606 will then result in the gains being taxable.
  • If daughter had declined the distribution, perhaps the inherited Roth could have been transferred to another custodian, since daughter would have 10 years with no annual RMDs for the inherited Roth to generate tax free gains, and all gains would be tax free in year 3 because 3 more years added to the 2 years mother held the account would result in the inherited Roth being qualifed in 2026.

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