Stretching Inherited Roth IRA Rules

Submitted by Todd Martin on Thu, 2016-03-17 22:39

A client is currently contributing their employee contributions to a Roth 401k. Do I understand correctly that this money will grow tax free indefinitely and there are no RMD requirements when they turn 70 1/2? Will their beneficiaries also inherit this money tax free if they take it as a lump sum distribution when the owner dies? Can the beneficiary “stretch” the Roth IRA and continue the tax free growth over their lifetime as well if they desire? Or does the IRS require some kind of RMD distribution if they decide to “stretch” the Roth IRA? I assume the distributions and growth will continue tax free from one beneficiary to another repeatedly until the balance of the account reaches zero. Thank you for your help and consideration.



Submitted by Alan - IRA critic on Fri, 2016-03-18 00:01

  • The Roth 401k will have RMDs for the client unless client rolls it over to a Roth IRA prior to the year they reach 70.5. If they continue to work beyond 70.5 there are no RMDs until they retire, but once they retire and roll it over to a Roth IRA, there will be an RMD due from the Roth 401k for the year of retirement. To make that RMD as small as possible, they should try to do an in service rollover by the end of the year before the year they plan to retire.
  • If client already has a Roth IRA for at least 5 years, the Roth IRA is qualified and the Roth 401k money will also be immediately qualified once it hits the Roth IRA. If this is the first Roth IRA of the client, the earnings in the Roth IRA do not become tax free until 5 years has passed from the year of the rollover.
  • Beneficiary RMDs will be tax free unless they drain the entire account before the 5 years is up and then only the Roth IRA earnings would be taxed if this is the first Roth IRA. A non spouse Roth beneficiary taking out only RMDs IS the life expectancy stretch. If the beneficiary passes before the account is fully distributed, RMDs based on the first beneficiary’s age will continue to the successor beneficiary. The successor does not get a new life expectancy stretch.
  • Distributions from the Roth IRA when the Roth IRA is not yet qualified come out under the ordering rules, where the regular contributions come out first, conversions second and earnings last. In this situation the amounts contributed to the Roth 401k are treated as regular Roth IRA contributions. Client must have figured the amount of regular contributions (and conversions if applicable) in order to report Roth IRA distributions.
  • Things are much simpler if the Roth IRA is already qualified since that eliminates all the accounting and the Form 8606 completion. So if client does not have a Roth IRA yet, he might consider making a contribution to start the Roth IRA 5 year clock running.


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