Inh 401k to Inh Roth IRA
Client elected to create an Inh Roth IRA when inheriting mother’s 401k. She paid taxes at time of creation of the Inh Roth IRA. What are the tax implications of taking money out of the Roth IRA – for example, is there a 5 year holding period? I believe no penalties ever since it is inherited and penalty dies with owner. But, 5 year rule on qualified distributions? 5 year rule on conversions? Her intention is to leave it for the 10 years to grow tax free and then take all, but what if she takes some in the first 1-5 years? -m
Permalink Submitted by Alan - IRA critic on Tue, 2025-05-06 11:28
This called a qualified rollover contribution creating a new inherited Roth IRA. Until that Roth has been held 5 years, any distributions follow the usual Roth IRA ordering rules. Since there are no regular Roth IRA contributions, only the qualified rollover, any distributions up to the amount of the rollover are tax and penalty free. Because the account is inherited there is never a 10% penalty, so that eliminates any conversion 5 year holding period, leaving only the 5 year holding for any gains to be qualified. Client should save the Form 5498 that reports the rollover contribution.
Therefore, distributions up to the amount of the rollover are tax and tax and penalty free, and after the Roth has been held 5 years, it will be qualified and any gains would also be tax and penalty free. In that first 5 years any distributions will have to be reported on Form 8606 with the rollover amount shown on line 24 as Roth conversion basis. After 5 years, the 8606 is no longer needed as the inherited Roth will then be qualified (5 years and inherited).
Note that if client has also inherited a Roth IRA from mother, it should not be combined with the above inherited Roth IRA because these accounts would have different 5 year starting dates.
Permalink Submitted by Mhotchkiss on Tue, 2025-05-06 16:31
perfect, thank you! -m