When a beneficiary inherits a Roth IRA, does that individual have to t

[Guest jasonc]

when a beneficiary inherits a roth IRA, does that indiv have to take MRD's over their lifetime or could they continue to let grow tax-deferred during their lifetime and pass on to a future generation?

Is the deadline for 2000 roth contributions 4/15/01 or 12/31/00?

[Guest Paul Leslie]

Jason the rules for the Roth are the same as the rules for regular IRA. To answer your question--No you can't leave it in there or roll it in to your own (assuming your not the surviving spouses)

Non spouse beneficiary must have the Roth IRA closed by the end of the 5th year after the year of death. Watch out in order to get the income tax free the earning must stay in the Roth at least 5 years from the date of orginal contribution.

So let say I make you the benny of my Roth that I first opened 1999 with a 2,000 contribution. Now I died today. For fun lets assume it is worth 1,000,000, you would have to wait until end of 2004 to get that money tax-free. If you took it out before that you would pay income tax on the earnings but not the 10% penalty.

The other method is for you to start taking distributions based on your life expectancy but this must start within one year after the year of death.

You can make contributions to Roth up to the due date of the return not including extensions, which would be 4/15.

[wmyer]

I completely agree, except that April 16, 2001 would be the deadline for year 2000 IRA contributions because April 15 falls on a Sunday.

[Guest Mary Ann]

If this Roth IRA was originally a conversion - instead of a contributory Roth - would the 10% penalty apply if the beneficiary decided to take it out over his lifetime - and the 5 year period had not yet gone by when the first required distribution was made?

[Guest Paul Leslie]

Mary Ann-- There would be no 10% penalty because the death exception to the penalties under 72t would apply.

The only issue would be whether it would be taxable. One issue that will be around for few years is when someone elected the 4 year spread. In the year of death any unreported roth conversion will be reportable by the deceases final 1040. This will be ending in a few years because you were only allowed to the 4 year spread in 1998.

[Guest Mary Ann]

Well, that is what I would like to believe - that there would be NO 10% penalty on distributions of a conversion Roth IRA to beneficiaries prior to 5 years being up.

But, when I read Reg. 1.408A-6, Q & A 11, I wondered why this allocation of each type of contribution/conversion to multiple beneficiaries is necessary? Since the beneficiary steps into the shoes of the original owner as to holding period then distributions to the beneficiary must also be qualified distributions. Q & A 1 defines a "qualified distribution" as:

1) Made after a 5-taxable-year period; AND

2) Made on or after the date on which the owner attains age 59 1/2, made to a beneficiary or the estate of the owner on or after the date of the owner's death, . . . .

So, it appeared to me that the exception of "death" related only to having no penalty for a distribution before one was 59 1/2 - that it did not relate to the other half of the requirement of having been held 5 years. I have not been able to find an absolute source stating that there would be no penalty if distributions were taken by a beneficiary over his lifetime. Though to me it only makes sense that if one is required to take the distributions (admittedly a choice over the requirement that all must be distributed by the end of the 5th year following the year of death) there should not be a penalty. If anyone can point me to any article - or anywhere - which goes into detail on this topic, I would appreciate it.

[Guest Paul Leslie]

Mary Ann the section of the regs you are looking at relates to a qualifed distribution. Reg. 1.408A-6 Q & A subparagraph (B) defines what a qualifed distribution is. A qualified distribution is not subject to income tax. The section you cited only relates to whether the money coming out of the Roth is taxable.

That has nothing to do with penalty. IRC 72(t) discuss when a distribution from a traditional or Roth IRA is not subject to the 10% penalty.

The reason for the allocation between contributions and conversion amounts is that conversion amounts are taxable unless they stay in the Roth for 5 years and in this example distributed because of death. Any time there is a distribution it is deemed to have come first from contributions and the conversions and last earnings.

Hope that helps clarify.

[Guest Paul Leslie]

Mary Ann the section you were looking for is Reg. 1.408A-6 Q & A 5 that deals with when penalties apply.

I forgot to put the full cite in my previous posting Reg. 1.408A-6 Q & A 1 subparagraph (B)

[Guest Mary Ann]

Thank you Paul. I believe I now have the definitive answer, which is contained in Q&A 5, part (B). Part (B) deals with the 10% penalty on distributions from conversions which have not been held 5 years. The clincher was the last line in (B): "The exceptions under section 72(t) also apply to such a distribution." Of course, death being one of the exceptions, it now seems apparent that an inherited Roth beneficiary will not suffer any 10% penalty. What a long time this took to finally come to a firm answer!!!!!