Stretch Roth IRA taxation question:
An article in the Sept 2008 FPAjournal states:
[quote]”When the distributions of the Roth IRA are made, they are only tax free to the beneficiary up to the date of death value of the Roth IRA (post death appreciation of the assets in the Roth would be subject to ordinary income tax).”[/quote]
I was under the assumption the entire account in the stretch Roth IRA would be tax free (date of death value and appreciation) going forward.
Which is correct?
Permalink Submitted by Alan Spross on Tue, 2008-10-14 21:02
That Quote is not correct, very surprising.
The date of death value on an inherited Roth is immaterial. If the account had already attained qualification during the owner’s life, all distributions are tax free.
If the account had not become qualified, the 5 year aging process continues to run including the period that the owner lived added to the time held by the beneficiary after the owner’s death. When the total meets the 5 year holding requirement, the earnings can be distributed tax free as well as the basis in the account. Earnings always come out last until the account is qualified. What you assumed is true only after the 5 year holding period has been attained.
If the beneficiary distributes earnings prior to qualification, then the earnings accrued prior to the owner’s death as well as after are taxable.