Inherited Roth 401k
If a non-spouse inherits a Roth 401k that had been held for 5 years or more by her son in the 401k, can she move to an inherited IRA today and immediately take a distribution from the Inherited IRA and be tax free? I believe the 5-year rule would have been met under the participant in the 401k does anything change due to the fact she moved to inherited?
Permalink Submitted by Alan - IRA critic on Tue, 2024-05-28 23:25
A direct rollover of the inherited Roth 401k must be done to an inherited Roth IRA, after which a tax free distribution can be taken from the inherited Roth IRA up to the amount of the direct rollover. However, any subsequent gains in the inherited Roth IRA will be taxable until the inherited Roth IRA itself has been held 5 years.
As for beneficiary RMDs, because the mother is an EDB (not more than 5 years younger than son), her beneficiary RMDs begin in the year following her year of death based on her single life expectancy, and such RMDs should be tax free until they exceed the amount of the rollover. After 5 years in the inherited Roth even the gains in the Roth IRA will also be tax free. Form 8606 must be used to report distributions until the Roth IRA is itself qualified.
Mother also has an alternative which might be useful if she is in her 80s. She has a choice to opt out of EDB treatment and into the 10 year rule. While the inherited Roth IRA will have to be drained in 10 years, there are no annual beneficiary RMDs due, but she can still take distributions whenever needed.
The above assumes that the direct rollover to an inherited Roth IRA is done in the year of death. If the death was in 2023, please advise.