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Inherited IRAs and Roth IRA Distributions. This Week’s Q&A Mailbag

By Sarah Brenner, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

This week's Slott Report Mailbag looks into inherited IRAs, RMDs, and Roth IRA distributions. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.

Question:

I inherited a traditional IRA from my husband, and it has been retitled into my name and social security number.  I also have other traditional IRA accounts that I am the owner of. Can I commingle these accounts to take one combined RMD from one of the accounts?

Answer:

As a spouse beneficiary, you may roll over, transfer, or elect to treat the IRA you inherited from your spouse as your own.  You made the IRA your own and it is now retitled into your own name and social security number. That IRA will be treated like any other IRA you own in your own name. You may combine the assets with your other owned IRAs, but not the inherited IRA. You could also decide to keep the IRA separate from your other IRAs, and then aggregate your required minimum distributions (RMDs) and take the total amount from one IRA. Inherited IRAs would not be included in your aggregate RMD.

Question:

I read the Slott Report and appreciate your efforts to inform the readers.  I watched your PBS show before I retired and “married” the idea of converting to Roth over time.  I have been doing so in annual installments since retirement in 2014.  

My wife and I recently found the perfect retirement home (not a first home) and have a signed contract to purchase.  While we can easily qualify for a loan, for several reasons our preference is to avoid the financing alternatives we’ve investigated.  This is primarily due to our desire to avoid any interest payments.  We want to pay cash for this home from available sources.  This includes Roth IRAs and several “cash” accounts we have available.  We understand that the “earnings” in a Roth IRA cannot be distributed without penalty until each annual account is five years old.

We would like to take distributions from our Roth IRAs in an amount equal to what we have contributed/converted.  Our advisor indicated he thought we might be required to pay a penalty because the history of these accounts isn’t at least five years old.  This advisor’s opinion differs from what I’ve learned reading the Slott Report over several years, and also from these articles I found online today:

I’m 65 years old and my wife is 68.  Can we withdraw contributions/conversions (only) due to our ages being over 59½?

Additionally, how will/should our investment advisor report this distribution to us and the IRS at the end of the year?  Is there a separate line on 1099 for such distributions, or will we have to maintain detailed documentation to avoid penalties?

Thanks, Andy

Answer:

Hi Andy,

Good news! You do not have to wait five years to access your contributions or converted funds penalty-free from your Roth IRA. Under the ordering rules for Roth IRA distributions, your contributions come out first and are always tax and penalty free. In addition, once you have had any Roth IRA for at least five years, all distributions from all your Roth IRAs will be income tax free because you are over the age of 59 ½. There would also never be an early distribution penalty because of your age.

Distributions of converted funds are also always penalty-free as long as you are over age 59 ½. It is only those who are under age 59 ½ at the time of the distribution who need to be concerned with satisfying a five-year holding period to avoid the 10% early distribution penalty on distributions of converted funds. Because you are age 65 and your wife is age 68, you do not have to worry about the penalty.

Your IRA custodian will report the Roth IRA distribution to you and the IRS on Form 1099-R. You will report your distribution on Form 8606. That is the form you will use to show that distribution is tax and penalty free. 

 

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