Inheritence and Roth maximum contributions

[Guest scritchdog]

My mother-in-law(MIL) passed away recently and we now have a Roth and a regular IRA that my wife and her sister have been named as beneficiaries. My wife currently has a Roth. Does the money from my MIL's Roth count towards the total contribution allowable for the year 2002 for my wife's Roth? Are we allowed to combine my MIL's Roth with my wifes? Would there be any advantage with keeping them separate? I was looking at taking my MIL's Roth as two separate distributions into my wife's Roth (one for 2001 and one for 2002) if my MIL's Roth counts towards my wifes contributions.

Thanks for your help.

[John G]

The inheritance Roth has no direct impact on your right to fund a Roth for either you or your wife. If a distribution comes to you, treat it as cash that you can direct as you wish. Whether you and your wife qualify for contributing to a Roth for either year is a function of your adjusted gross income, filing status and "earned" income. For example, if either of you have a total of $6,000 in earned income (like paychecks that generate w2s) then you meet the earned income test for 2002 for the maximum Roth contribution. The max income test is a function of AGI and filing status. For example, if your income is below 150,000 and you file a joint return you can contribute the full amount. Between 150k and 160k the contribution limit phases out to zero.

The accountants who post messages can better answer the transfer/combine vs separate issues.

I highly recommend that you review your situation with a tax specialist to make sure you understand your options, the deadlines and tax implications.

[Guest mpedroza]

The contributions that your MIL made have no affect on if your wife can contribute to her own Roth IRA...since she already has a Roth, it is assumed she is already meeting the qualifications, as mentioned by John G., to have one.

Her options on what to do with the money she inherited depend on how long her mother had owned the roth....all of it is considered tax free income once it has existed for five years...for example if she opened it in 1998, it can be distributed in 2003 as a death distribution tax free, or she could keep it in her mothers name as a deceased person, for benefit of your wife (reported under your wifes SS#)and continue to allow it to grow (earnings only, no additional contributions are allowed) for as long as she wants. If she wants to take any of it out now, she is able to take death distributions as long as it is principal or basis only, not any of the earnings, without taxable implications. She does not have the option to transfer the account into a Roth account in her name, only a spouse beneficiary can do that.

[JAMES PATRICK]

She can NOT leave it there as long as she wants. If she does not begin taking withdrawals based on her life expectancy by 12/31 of the year after your MIL died than she MUST close the account 5 years after the death of the MIL. Otherwise there is a 50% penalty on the amount not withdrawn.

[John G]

Worth repeating:

I highly recommend that you review your situation with a tax specialist to make sure you understand your options, the deadlines and tax implications

[Guest mpedroza]

I stand corrected, the Roth IRA Participant (MIL)wouldn't have to start mandatory distributions, however as James Patrick indicates, your wife can start life expectancy distributions by 12/31 following the year of death or must distribute it all by the 5th anniversary of the date of death...however ultimatley it can be tax free money to your wife.