Roth Distributions by beneficiary

[Guest rick123]

I did a search on this but only came up with traditional ira's. ok, if one dies with a roth, and leaves it to a child and a grandchild. 50% to each. the child is 40 and the grandchild is 12. Am i correct that each would take distributions over their life expectancy? If they took out more than that, wouldn't it be a taxable event?

thanks

[JAMES PATRICK]

If an individual inherited a Roth and took it ALL before the account was open 5 years than there would be taxes on the earnings . Once the account is Qualified than NOTHING will be taxed when it is withdrawn.

[Guest rick123]

so, does this mean that a beneficiary (if account is 5 yrs old) can either take payments over his life or all at once or leave it in indefinately?

thanks

[Mary Kay Foss]

You can't leave it in indefinitely. The Roth owner need take no distributions during life but an inherited account requires distributions. Life expectancy of the beneficiary or 5 years are the two choices. Life expectancy is the default, you elect it by taking a distribution of the minimum amount based on life expectancy by 12/31 of the year after the death of the Roth owner. If this deadline is missed, you use the 5-year rule. With this rule, no minimum amount is required in any year but everything must be drained from the IRA by 12/31 of the year that contains the five year anniversary of the death.

There's still no tax on the distributions, but the 50% penalty for not taking the minimum can apply so you should adopt a strategy and stick to it.

[Guest rick123]

thanks!

If the account is large enough, and the bene young enough, this account could last past the bene's life span

[txdd]

I think there's still some misunderstanding.

An inherited IRA cannot last past the (non-spouse) beneficiary's original life expectancy. The divisor is reduced by 1 every subsequent distribution year so it eventually gets to be 1 or less. For instance, if the beneficiary's life expectancy is 32 years in the first distribution year (MRD = 1/32 of balance), the MRD will be the entire (previous Dec 31) balance in the 32nd year.

Of course any beneficiary, regardless of age, can die before the final distribution.

[Appleby]

True txdd,

However, a successor beneficiary may continue distributions over the life expectancy of the fist beneficiary

[Guest rick123]

however,

couldn't a non spouse bene take distributions from roth and pay no taxes on what he takes out and then.....name a new bene on the account and it could conceivably continue to next generation?

[BPickerCPA]

Rick,

I think you missed the point. At the time the original account owner dies and the account is inherited by a non-spouse, the payout period is set and cannot be extended. So if, as in txdd's example, the payout period is 32 years, the account will be paid out in no more than 32 years whether the beneficiary survives that long or dies sooner.

[Guest rick123]

I agree but my thinking was that IF the bene died before the 32 years, wouldn't the remainder go to his designated beneficiary? Or, in this example, if he died after 4 years, does the entire balance have to be distributed then? What is this talk i hear of a stretch ira? does that only apply to regular ira's? lastly, to avoid any taxes on the roth from a non spouse payout, it has to be taken out over the life expectancy, correct?

thanks so much for clarifying

[BPickerCPA]

If you die 4 years into the 32 years, the successor in interest has 28 years to take the IRA, IF THE CUSTODIAN PERMITS. Some will insist on an immediate payout, so check that out. There can never be income tax on a Roth IRA after five years have passed since the account was opened. Within 5 years, only income would be taxed, not contributions or conversions, so the likelihood of a required post death distribution consisting of income is remote (but not impossible). As you can see, you can stretch a regular, or a Roth, IRA.

[Guest rick123]

thank you so much for clarifying. just so i have it straight, i'm assuming if my life expentancy was 32 yrs, i could take it ALL out sooner than that but not any longer. what i guess was throwing me was that IF i lived that extra year or so after 32, i would just have to clean the balance out in that 32nd year even if it were a large sum.

[John G]

Barry, Noting the point you make above.... do you think it would be possible to relocate the IRA if the custodian insisted on "take it all stance" or is that something that you would have to do before the death?

[BPickerCPA]

John,

When the custodian insists on taking it all, people have gone to the IRS for a PLR that permits the transfer. Once they have that, the custodian can't refuse, unless they enjoy litigation.