TAXES FOR A ROTH IRA BENEFICIARY

[Guest CPoulosky]

If a NON-SPOUSE beneficiary inherits a Roth IRA that has NOT been in existence for 5 years, what is the taxable implications for the beneficiary? Will the distributions (excluding contributions) be taxable as ordinary income or will they be received to the beneficiary income-tax free?

[Michael Devault]

According to IRS Publication 590, "If a distribution to a beneficiary does not satisfy the requirements for a qualified distribution, it is generally includible in the beneficiary's gross income in the same manner as it would have been included in the owner's income had it been distributed to the IRA owner when he or she was alive."

As I interpret this, since the money hasn't been in the Roth IRA for 5 years, it cannot be a qualified distribution. So, the beneficiary will have to pay tax on the earnings, when distributed.

Hope this helps.

[Guest Mary Ann]

Of course, there is another alternative other than taking the entire distribution at once. If you take the funds out over the beneficiaries life expectancy then likely the annual amount withdrawn will be quite small. Since contribution amounts come out first, it is very likely that there would be no taxable income (it would all be the initial contribution or conversion) - there would be no taxable interest or dividends. Once five years has passed, there would be no taxable income at all. So you do not necessarily have to pay any tax on a Roth distribution from an inherited IRA. And if you desire, you can take out larger distributions down the road. It is true that if you take out the entire amount before 5 years, the income is taxable.

[Fred Payne]

The particular Roth the non-spouse beneficiary inherits itself need not have been inexistence for five years. The Five Year rule is based on ANY Roth IRA the decedant owns. The 5 year holding period is measured from the 1st day of the first calendar year in which a ROTH was established. A Roth established on December 31, 1999 measures its 5 year holding period from January 1, 1999. Any distributions from the Roth prior to the expiration of the 5 year period are considred Income with Respect to a Decedant (IRD) and eligible for Section 691© deduction.