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5 Year Rule - Inherited Roth IRAs


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I cannot find a good write  up anywhere that answers tehse questions. Can someone point me in the right direction?

1) Participant dies AFTER meeting 5 year rule.  Distributions from the Plan are tax free to the beneficiary, this much I know. What happens if the beneficiary rolls the money to an inherited IRA?  Does the 5 year clock have to start over? What if the beneficiary has another Roth IRA in which they did meet the 5 year rule? Is it determined seperately?

2) Participant dies BEFORE meeting the 5 year rule.  What happens if they leave the money in the Plan until the 5 year rule is met?  Does that get them a tax free withdrawal?  Or does the participants first year of contributions become a moot point?  What if they roll their money to an inherited IRA?  Does their 5 year clock start over when they first roll the money into the inherited IRA?  Even if they waited 2 years to complete the rollover?

To me this is incredibly complex and I cannot find a comprehensive guide with these answers anywhere...

 

 

Austin Powers, CPA, QPA, ERPA

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On 2/1/2022 at 9:40 PM, austin3515 said:

Participant dies BEFORE meeting the 5 year rule.  What happens if they leave the money in the Plan until the 5 year rule is met? 

austin3515, I think this one has an answer. The 5-year period continues to run and can be fulfilled after the participant's death, as long as the account is not distributed. See Treas. Reg. 1.402A-1, Q&A-4(c).

For the rest of your questions, I did not readily find an answer in the regs. There seem to be clear (and different) rules if you're going decedent's 401(k) Roth account to beneficiary's 401(k) Roth account, or decedent's Roth IRA to beneficiary's Roth IRA, but I did not find anything that seemed to directly address decedent's 401(k) Roth to beneficiary's Roth IRA. Hope someone else can shed light.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Complicated indeed! I think IRS Notice 2007-7 may be somewhat helpful.

Austin - doesn't 1.401A-1, Q&A-4(d) answer your first question if it is a spousal beneficiary? The 5 year clock doesn't restart.

As to a non-spouse beneficiary, they can roll over to an inherited IRA, as long as it is a DIRECT rollover, as per IRS Notice 2007-7. The inherited IRA treatment if the non-spouse beneficiary under 408(d)(3)(C) means, I believe, that the "normal" rules apply - that is, the beneficiary may NOT treat it as their own IRA for purposes of minimum distribution rules, and they can't roll it into their own existing IRA.

So, for RMD purposes, the non-spouse beneficiary who rolls it to an inherited Roth IRA account, as per 402(c)(11), you look to IRS Notice 2007-7 - see IRS Notice 20078-7, Q&A 17-19.

There may be a good writeup of all this out there somewhere, but I surely don't know of one. What little understanding of all this garbage I gleaned only after considerable (as the British might say) "mucking about."

Link to 2007-7 - https://www.irs.gov/pub/irs-drop/n-07-07.pdf

 

P.S. - and it ain't like I feel totally confident in this stuff - if it were a real situation I'd have to spend a lot more time...

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I can’t believe this stuff isn’t more well documented.  I might try and buy some “Ira answer book” or something just have a resource.  It’s hard not to have these sorts of answers for what I will refer to as my “next door neighbor”

Austin Powers, CPA, QPA, ERPA

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The law of retirement plans and accounts has enough complexity, including questions not directly answered on the surface of public law sources alone, that using a treatise (whether hardbound, or internet) often is worthwhile.

Roth IRA Answer Book likely answers your questions, and your continuing reference need.

https://law-store.wolterskluwer.com/s/product/roth-ira-answer-book-9e-misb/01t0f00000J4cWd

And if it doesn’t, Gary Lesser invites subscribers to ask him (or a coauthor) to figure out an answer for you. We use readers’ queries to improve the book.

If you’d use two or more Answer Books—for example, 401(k), 403(b), 457, and many others, you might consider a package-pricing deal.

If you were wondering, I have no royalty or other economic stake on any of the six books I’m a contributing author in.

While BenefitsLink is a wonderful resource, some questions might be more readily or more thoroughly answered in other ways.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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