Proceeds of Roth at death
What happens to a Roth IRA if the owner dies before he has held the Roth for 5 years? Can it still be stretched by the beneficiaries?
Thanks –
Ann
What happens to a Roth IRA if the owner dies before he has held the Roth for 5 years? Can it still be stretched by the beneficiaries?
Thanks –
Ann
Permalink Submitted by [email protected] on Thu, 2007-08-23 20:51
Yes. They still need to take out the death RMDs starting in year following death. Distributions from a Roth are FIFO, so if they restrict w/ds to the RMD, chances are very likely they will be a tax-free return of basis. As soon as the 5 years are up, all disributions will be tax-free, so it behooves the bene to only w/d the rmd, for maximum tax-free growth and tax-free later payout!
Permalink Submitted by Alan Spross on Thu, 2007-08-23 20:55
Yes, but the IRA agreement should be checked to make sure that designated beneficiaries make any election required by the time limit, which is typically 12/31 of the year following death.
Falling short of 5 year aging of the Roth does not affect the distribution options, but does affect the taxability of those distributions. It means that any distributions of earnings prior to the 5 year period results in the earnings being taxable. However, since the earnings do not come out until all other Roth balances have been distributed, taking modest distributions well in excess of the RMD requirement should not result in any tax. By the time earnings are taxed, the 5 year period should be attained and that includes time both prior to and after the owner’s death.
Also, a spousal beneficiary can make the Roth their own if their own Roth has met the 5 year holding period and spouse is 59.5. The rollover funds then acquire the aging of the spouse’s own Roth.
Permalink Submitted by [email protected] on Thu, 2007-08-23 21:11
Alan – I thought a spouse bene of a Roth has spousal continuation rights regardless of age of bene or Roth. If the spouse was under 59 1/2, they could take it as an inherited Roth and delay RMDs until the decedent would have been 70 1/2.
Permalink Submitted by Alan Spross on Thu, 2007-08-23 23:14
That’s right. In my last paragraph, I did not mean to infer that there was a pre condition for the spouse assuming, but that if they DID assume it they could wipe out a lesser holding period of the decedent’s Roth.