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  • Inherited Roth IRA

    My wife's father passed away in 2009 and she inherited a Roth IRA worth $600. She just gained access to it so we are trying to figure out what to do. Were we supposed to have withdrawn all of the money within 10 years? If so, how should we proceed and how much do we owe in penalties?

  • #2
    I have no idea what the legally correct answer is. But I believe the correct answer would be to value the assets as of the 10 year anniversary of the death, when distribution would be required by law. That would be your cost basis. Any gains after the 10th anniversary would become taxable gains, but that tax would only be due when the underlying asset is sold. So you could distribute the assets right now, in kind, and then not owe any tax on gains from that new cost basis until the assets are sold.

    The amount is so small and she just got access. I might simply take the $600 distribution and sit tight. If you ever hear from the IRS, at that point you could take action.

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    • #3
      The 10 year rule is related to the Secure Act which applies to inherited IRAs starting in 2020 and was not in place in 2009. Why did she just gain access? Is the figure of 600 dollars correct?

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      • #4
        Some clarifications:
        As pointed out by notanotherusername, the SECURE ACT'S 10-year distribution rule only applies to decedent deaths after 12/31/2019. When you are given access to the Inherited account is not relevant.

        It would be useful to answer their question to explain why your wife is only now gaining access to the inherited account.

        You should not just take a distribution of the entire balance without correcting the distribution failure. There is no Statute of Limitations (SOL) on failure to file Form 5329. Missed distributions are subject to a 50% excise tax penalty

        The default distribution option was probably lifetime. Normally, if you don't elect lifetime distributions by taking an RMD for the year following the year of death by 12/31. You are restricted to the 5-year option.

        The IRS has been allowing a waiver of the penalty and even resurrecting lifetime distributions by, making up all RMDs, filing Form 5329 and asking for a waiver of the penalty.

        However, given the extremely small amount, I would take a full distribution this year and file for a waiver of the penalty for failing the five year distribution.

        You would file a 2014 Form 5329 and claim the waiver for reasonable cause "whatever the reason is for this ridiculously long delay". Believe it or not the IRS will almost certainly waive the penalty.

        Make sure you follow the Form 5329 instructions exactly. Include proof you distributed the entire account and an explanation. Do NOT send any penalty.

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        • #5
          She just got access because it was forgotten about due to the small balance (which yes, is just over $600 in cash).

          Can anyone clarify what she was supposed to have done with it? Withdraw it all within a certain time period? I thought you were supposed to be able to inherit Roth IRAs and keep them but I can't find clearly the IRS guidance on what she should have done (hence I don't know the penalty)

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          • #6
            she was supposed to take out an amount based on her actuarial tables. We're talking probably something like 2%, so 2% of $600 in year 1. Consider it a lesson learned that cost you basically no money because this may happen in the future if you inherit an IRA with a much larger balance than $600

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            • #7
              I believe the custodian of the IRA, Fidelity for example, should have been sending a statement every year to the beneficiary indicating RMD. The % penalty for not taking RMD is significant.

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              • #8
                Originally posted by JBME View Post
                she was supposed to take out an amount based on her actuarial tables. We're talking probably something like 2%, so 2% of $600 in year 1. Consider it a lesson learned that cost you basically no money because this may happen in the future if you inherit an IRA with a much larger balance than $600
                The requirement was either the year of death or the following year. Don't bother looking it up. Follow spirit riders recommendation. Lost asset and little gain they will waive the tax. Fidelity has no responsibility for notifying , the beneficiary needs to claim. Outside of an estate it is very plausible. I doubt that you will be hit with 50% penalties on the 12 years of withdrawals. Not worth the effort, let the IRS do the work. The penalties are only on the missed RMD's, not the balance. It is not worth your or the IRS to even calculate it.

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                • #9
                  Originally posted by familydocPA View Post
                  Can anyone clarify what she was supposed to have done with it? Withdraw it all within a certain time period? I thought you were supposed to be able to inherit Roth IRAs and keep them
                  I already clarified this.

                  In most cases she could have taken lifetime RMDs. However, in order to do so, she had to have taken her first RMD by 12/31 of the year following the year of death. Because she failed to do so, it reverted to the five-year rule*. She needed to distribute the entire balance within five years. I gave you the options and the requirements.

                  ​​​​​​​This is somewhat covered in IRS Publication 590-B and the Form 5329 Instructions with a lot of reading between the lines.

                  *Not to be confused with the Roth IRA qualification five-year rules.

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                  • #10
                    P.S. I just remembered because of the financial crisis, there were no RMDs required for 2009. Even if her father was > his required beginning date (RBD). No year of death RMDs would have been required for 2009.

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