Inherited Roth IRA (non-spousal) question

[DivotDoc]

Hi all, I apologize if this is a really basic question. I'm not really sure what to do and thought someone here would probably be able to help.

My wife inherited a Roth IRA from her brother who passed away in 2018. The money has just been sitting in an inherited Roth IRA account since that time (currently about $25k). This past July I started as an attending and in July of 2024 my wife will start working as an attending. Seeing that our income is going to substantially increase in the next three years I was planning on taking the inherited Roth IRA money out for 2022 to save a little on taxes even though I believe it can technically sit in the inherited Roth account and grow tax free for a decade (2028). We were planning to contribute the same amount as what is currently in the Roth IRA to a 529 plan for our child (and use the tax deduction for the contribution towards 2023 taxes).

Unfortunately due to.... just being busy and forgetting, I'm just getting around to this now. I've already gotten a 1099-R for this account for 2022. Is it possible to reclassify a distribution from this account made today (2023) as counting towards my taxes in 2022? If so, how would I go about getting a new 1099-R for this account?

[bovie]

It's a Roth account, so it will have no effect whatsoever on your taxes owed for 2022 or any other year (assuming you follow distribution requirements, and that your wife's brother opened this account more than five years ago).

That said, and making some assumptions about your wife's brother's age when he died, given what I'm able to infer about your and your wife's ages seeing as you are contributing to a 529 for your own child, and the fact that your wife's brother died in 2018 (i.e., prior to 2020), I believe you should be able to hold these Roth funds in the inherited IRA for much longer than 2028 (i.e., your wife's entire life), with annual distributions based on her life expectancy.

The problem, though, is that it sounds like you may not have taken any distributions prior to this one that you took today.

If that is correct, then you may have missed the window to elect distributions based on your wife's own life expectancy (which would have needed to begin in 2019), and you may now need to take all of this money out well before 2028 (by 12/31/24, if I'm not mistaken).

Start here: https://www.irs.gov/retirement-plans...cs-beneficiary

However, considering it is only $25k, it really won't make a huge difference either way.

There are a few others who will likely chime in with perhaps even better information and advice.

Welcome to the forum.

[FIREshrink]

Hi all, I apologize if this is a really basic question. I'm not really sure what to do and thought someone here would probably be able to help.

My wife inherited a Roth IRA from her brother who passed away in 2018. The money has just been sitting in an inherited Roth IRA account since that time (currently about $25k). This past July I started as an attending and in July of 2024 my wife will start working as an attending. Seeing that our income is going to substantially increase in the next three years I was planning on taking the inherited Roth IRA money out for 2022 to save a little on taxes even though I believe it can technically sit in the inherited Roth account and grow tax free for a decade (2028). We were planning to contribute the same amount as what is currently in the Roth IRA to a 529 plan for our child (and use the tax deduction for the contribution towards 2023 taxes).

Unfortunately due to.... just being busy and forgetting, I'm just getting around to this now. I've already gotten a 1099-R for this account for 2022. Is it possible to reclassify a distribution from this account made today (2023) as counting towards my taxes in 2022? If so, how would I go about getting a new 1099-R for this account?

inherited in 2018 means pre secure act. if she elected to keep it in an inherited Roth she can stretch RMDs over her life expectancy.

Regardless, there are no taxes on Roth withdrawals. So there is no advantage to taking the money out now. In fact, it can only hurt, since money moved into a taxable account will be subject to taxes each year whereas the Roth will grow tax free.

[StarTrekDoc]

Secure 1.0 question. spiritrider for opinion?

Welcome to forum.

Hopefully can qualify for presecure status still and not forced to take out until needed. Continue grows tax free.

No tax implications on distribution itself. Only future earnings after distribution.

[F0017S0]

As others have said, this account should be grandfathered in as pre-SECURE.

Sorry for your loss...

[DivotDoc]

It's a Roth account, so it will have no effect whatsoever on your taxes owed for 2022 or any other year (assuming you follow distribution requirements, and that your wife's brother opened this account more than five years ago).

That said, and making some assumptions about your wife's brother's age when he died, given what I'm able to infer about your and your wife's ages seeing as you are contributing to a 529 for your own child, and the fact that your wife's brother died in 2018 (i.e., prior to 2020), I believe you should be able to hold these Roth funds in the inherited IRA for much longer than 2028 (i.e., your wife's entire life), with annual distributions based on her life expectancy.

The problem, though, is that it sounds like you may not have taken any distributions prior to this one that you took today.

If that is correct, then you may have missed the window to elect distributions based on your wife's own life expectancy (which would have needed to begin in 2019), and you may now need to take all of this money out well before 2028 (by 12/31/24, if I'm not mistaken).

Start here: https://www.irs.gov/retirement-plans...cs-beneficiary

However, considering it is only $25k, it really won't make a huge difference either way.

There are a few others who will likely chime in with perhaps even better information and advice.

Welcome to the forum.

Thank you for clarifying that. I think I was reading about taxes on earnings from the account but now realize that's only if the original account was open less than five years (which it was open for longer than that).

I did take the RMDs since 2019 but honestly it's been a bit of a pain to calculate and then move such a small amount of money (few hundred dollars/year). We figured the 529 should also grow tax free and wanted to use that money in a way that her brother would have loved (future education costs of our child). I also figured it would be easier because we would need to stop worrying about taking the RMDs each year.

I know there are issues with having too much money in 529s but we plan on having more kids and with the cost of secondary education I can't imagine this one time deposit at least 18 years before it's due to be used is going to balloon to an amount where we have a problem with having too much money in a 529. Does this make sense? Is there anything I'm missing?

[StarTrekDoc]

Moving Roth to 529 doesn't make sense. Are you talking about moving just the rmds? Or just want to KIS and not be bothered with it at all and move en total to 529?

If you have taxable income wanting to protect more, then do that 529 funding.

I wouldn't move protected to protected unless you're bothered that much by the rmd calculation

[jfoxcpacfp]

I have mixed feelings about this. If you live in GA, IA, or MS, you may be able to get a tax deduction for 2022 by moving some/all to 529(s) by 4.18.2023. Regardless, a 529 is unique in that you can make a contribution which counts as a completed gift, even though you continue to maintain control over it. In the right situation, it is a great tool for estate planning.

[bovie]

Thank you for clarifying that. I think I was reading about taxes on earnings from the account but now realize that's only if the original account was open less than five years (which it was open for longer than that).

I did take the RMDs since 2019 but honestly it's been a bit of a pain to calculate and then move such a small amount of money (few hundred dollars/year). We figured the 529 should also grow tax free and wanted to use that money in a way that her brother would have loved (future education costs of our child). I also figured it would be easier because we would need to stop worrying about taking the RMDs each year.

I know there are issues with having too much money in 529s but we plan on having more kids and with the cost of secondary education I can't imagine this one time deposit at least 18 years before it's due to be used is going to balloon to an amount where we have a problem with having too much money in a 529. Does this make sense? Is there anything I'm missing?

The benefit of the 529 is tax-free growth and tax-free withdrawal, if used for education expenses.

You already have the benefits of tax-free growth and tax-free withdrawal with the Roth account structure, regardless of what you use it for.

Keep it in the Roth. Otherwise you are just adding restrictions to this money, for minimal/no benefit. Perhaps some relatively small tax deductions.

Considering that your wife’s brother may have been happy to see this go toward your kids’ education, you can just consider this account a de facto 529 and still use it to pay for their education when the time comes—but with the added flexibility that you can use it for anything else, should you need/choose.

And you can then put the annual RMDs into an actual 529, along with any other contributions you choose to make from your earned income.

I think this is the best play here, all things considered. The RMD calculations really aren’t that bad.

[spiritrider]

^This

It makes no sense to take any withdrawals in excess of the RMD from an inherited Roth IRA to move to a 529. You are moving from a fully qualified tax-free account to an account subject to withdrawal qualifications.

Almost all IRA custodians do an end of year RMD calculation and most allow you to set up automatic withdrawals of that amount.

[Tim]

This:
”Almost all IRA custodians do an end of year RMD calculation and most allow you to set up automatic withdrawals of that amount.”.

You can do it lump sum once each year. Seems like you confused this with converting pretax balances to Roth.

[spiritrider]

I'm not sure what you are saying. I'm not confusing RMDs with Roth conversions.

IRA custodians must report to you an end of year balance. For accounts subject to RMDs, almost all will include the calculated amount.

Most of the latter will allow you to set up automatic withdrawals. Those can typically be annually on any date or monthly on any day.

[Tim]

I'm not sure what you are saying. I'm not confusing RMDs with Roth conversions.

IRA custodians must report to you an end of year balance. For accounts subject to RMDs, almost all will include the calculated amount.

Most of the latter will allow you to set up automatic withdrawals. Those can typically be annually on any date or monthly on any day.

My comment was intended for OP. An inherited Roth with life expectancy RMD’s is about the best inheritance one can receive and you pointed out how easy it is.

[dennis]

So to add to the confusion: With Secure 2.0 excess 529 funds after the child's education can be put into a Roth for the child (following the rules for yearly amounts of course). So how about this scenario: Wife's Inherited Roth IRA -> wife -> child's 529 -> after education excess to child's Roth with a lifetime max of $35K. The 15 yr holding period for the 529 is easily met in the OPs situation.