Roth inheritance

[Sandy & Shirley]

As I understand the laws on this:


My partner and I have both owned our Roth account for more than 5 years, so the 5 year rule does not apply. We can each set up our wills so that the other inherits each other’s Roth account totally tax free. And, the inherited Roth can then be merged with our own Roth.



Then, the survivor can set up their will so that their (combined) Roth account can be converted to cash, not really necessary, and then the single Roth account could be split into 6 separate account, one for each of our 6 combined children. Again, their inheritance would be tax free and not subject to the 5 year rule.


Is anyone here familiar with the Tax and Legal issues on this? Are we correct on how this would work? Again, each of us has owned our personal Roth account for more than 5 years.

[RunningBum]

I don't think you can or should merge them. If you inherit an IRA, you have to drain it within 10 years. One of the exceptions is inheriting from a spouse, where you can just put it in your Roth. But you said partner, not spouse.

My usual source for IRA questions, Fairmark, appears not to be up to date with the Secure Act changes, but I believe this site is: https://www.nerdwallet.com/blog/inve...hat-to-do-now/

[kaneohe]

Quote:

Originally Posted by Sandy & Shirley As I understand the laws on this: My partner and I have both owned our Roth account for more than 5 years, so the 5 year rule does not apply. We can each set up our wills so that the other inherits each other’s Roth account totally tax free. And, the inherited Roth can then be merged with our own Roth. ........................................

Spouse's can make their spouse's IRA theirs when inherited (or keep as inherited). Not sure about partners.

[RE2Boys]

IRAs are passed on to the named beneficiaries upon the death of the owner. A will has no bearing upon who would inherit an IRA, whether Roth or Traditional

[ivinsfan]

Quote:

Originally Posted by RE2Boys IRAs are passed on to the named beneficiaries upon the death of the owner. A will has no bearing upon who would inherit an IRA, whether Roth or Traditional

the issue isn't inheritance it's combining

[Sandy & Shirley]

Quote:

Originally Posted by RunningBum I don't think you can or should merge them. If you inherit an IRA, you have to drain it within 10 years. One of the exceptions is inheriting from a spouse, where you can just put it in your Roth. But you said partner, not spouse. My usual source for IRA questions, Fairmark, appears not to be up to date with the Secure Act changes, but I believe this site is: https://www.nerdwallet.com/blog/inve...hat-to-do-now/

Thanks, that nerd wallet link is going to be very useful.


Looks like we fall within one of the exceptions to the Secure Act (which I was not aware of), Shirley is only 9 year younger than I am and the forth exception says “ You’re not more than 10 years younger than the account owner”.

As for our children, I’ll have to teach them about what I call “Back Door Roth Contributions”. When they are forces to slowly take the money out of the inherited Roth over 10 years; they can use the extra cash to make their maximum personal yearly Roth Contributions of $6,000 or $7,000, PLUS, they can do some Roth Conversions of their traditional IRAs.

For example they convert $40,000 a year. Each year they will owe about 22% to the Fed and 8% to the State, a total of 30% or $12,000 in taxes. They can tell their brokers to do the conversions and not to withhold any taxes, then use the tax free withdrawals from their inherited Roth accounts to pay their “estimated” taxes (I always do this on the day of the conversion). Basically this is a way of doing an additional $12,000 Roth Contribution, through the back door! The entire $40,000 goes into their personal Roth, not just $28,000 after tax!

[pb4uski]

It looks to me that if either of you were to die first that you would have a inherited Roth IRA with withdrawals over life in addition to your own Roth IRA.

Each of the IRAs would have the six kids as beneficiaries (or while you are both alive as contingent beneficiaries in the event that the two of you were to die simultaneously).

[SecondCor521]

Quote:

Originally Posted by Sandy & Shirley As for our children, I’ll have to teach them about what I call “Back Door Roth Contributions”.

You might be interested to know that what you call back door Roth contributions is different from what other people call back door Roth contributions.

What is more commonly meant by that term is a way for a person whose income exceeds the limit for a regular Roth contribution to get around the income limits. They do this by making a non-deductible contribution to their traditional IRA (which has no income limits), then immediately convert that amount from the traditional to the Roth.

What you're referring to is just doing a Roth conversion and paying the taxes out of other funds, which is a common strategy but doesn't have any particular name as far as I know.

You using the term differently may confuse your children and may result in them missing an opportunity to do what others call a back door Roth conversion when it might be appropriate for them to do so.

...

I'm still curious if you're married to each other or not, as that has implications for the first half of your plan.

...

For the second step of your plan, since the six kids are non-spouse beneficiaries, they have 10 years to drain the Roth on any schedule they see fit. Distributions would be tax and penalty free, but the account would need to be drained within that 10 year period (technically they have until 12/31 of the year containing the 10 year anniversary of the original owner's death, but that's a nitpick that I seem to be nitpicky about).

[Dash man]

You may want to consult with an estate attorney about setting up an Inherited IRA Trust. You would each have one and the contingent beneficiary is the trust. Each of the kids would be a beneficiary to the trust.

[Sandy & Shirley]

SecondCor521,


Thanks again for making me look into what I called the Back Door contribution. In some ways that might be the case if you are doing the conversion after the age of 59 ½ , but after further investigation it seems that if you do have the taxes withheld from the actual converted funds before the age of 59 ½ you would be subject to the 10% early withdraw penalty. Convert $10,000, withhold 30% for Federal and State taxes so only $7,000 gets into your Roth. The Feds look at this as a $7,000 conversion and a withdraw of $3,000 for other purposes which would be subject to the 10% penalty if you were under 59 ½ when you did it.