Roth 5 Year Rule – Inherited Roth
A Roth account was held by Father at Schwab in 2018, 2019 (was held in Roth for many years prior, but new to Schwab in 2018. Father passed in 2020 and Son inherited Roth IRA in 2020.
Schwab will not recognize prior holding periods and Son needs to meet the 5 year holding period on his own for tax form to show code “Q”. The 2024 distribution shows code “T”
Is the 5 year rule met IN YEAR 5 or starting day one in year 6?
year 1 = 2020, year 2 = 2021, year 3 = 2022, year 4 = 2023, year 5 = 2024.
Should Schwab have coded Q in 2024? Or will that start in 2025? The Roth has been around at Schwab for 7+ years. but they will not link Father ownership to Son ownership for 5 year rule time frame.
Should son simply code Q on his tax return? How do you show 5 year rule has been met with Code T is on the 1099?
Permalink Submitted by Alan - IRA critic on Mon, 2025-03-31 12:06
If Schwab is willing to report code Q (many custodians will not), it should have started with 2023 distributions since 2018 counts as the first of the 5 years even though Schwab chooses to ignore father’s holding period. Therefore, they are limiting code Q more than the 1099R instructions allow.
Son is entitled to use father’s holding period dating back to the first Roth contribution well before Schwab acquired the account. Son does not need a Q code to treat the inherited Roth as qualified and therefore Form 8606 is not needed to report any distributions. They go directly on line 4a of Form 1040. And since the Roth is qualified, son no longer needs to determine or track the Roth IRA basis. In other words, use of code T presents no real problem as long as son has some documentation that the 5 years has passed.
As for RMDs, the 10 year rule applies and the inherited Roth needs to be drained in 2030. But since there are no annual RMDs the account can be left alone to generate tax free gains until 2030.
Permalink Submitted by Matt Groome on Mon, 2025-03-31 13:19
Thank you for the response. Just a point of clarification, in what year will the son independently meet the 5 year rule? 2024 because it is IN YEAR 5 (2020 – 2024) or in 2025 because it is AFTER year 5? I can’t seem to pin that down.
Permalink Submitted by Alan - IRA critic on Mon, 2025-03-31 13:40
Sorry for the confusion. Will edit prior post. Son qualifies without considering father’s holding period in 2025. The 5 years are 2020-2024. Of course, per the tax Regs, son is allowed to consider father’s holding period which starts with his first contribution to any Roth IRA well before the account was moved to Schwab. A 1099R coded T can be treated as if the Q code were issued as long as the beneficiary knows when the 5 years started.