Roth IRA

[ldreyna]

A t/p received a 1099-R code T. Said it was because she was the beneficiary. The person who owned the IRA was her half-brother who passed away. T/p didn't even know about it. Amount on line 1, total distribution, taxable amount not calculated. I was thinking that since this was "inherited" that it would be nontaxable. When I fill out the 1099R on the program, the amount distributed shows up on line 15b on the 1040(taxable). Am I wrong in thinking it is non-taxable? I read in "the Taxbook" that inherited Roth IRA is not taxable. Maybe I am understanding something wrong. Can anyone clear me up in this situation?

Thanks

[Margaret CPA in OH]

If it was a traditional IRA, it is taxable as the decedent deferred tax on it during life. If decendent had received distributions, they would have been taxable at that time.

[ldreyna]

^{Thanks-this is a Roth IRA and the beneficiary received a distribution on 1099R.}

[Margaret CPA in OH]

Then I think it should not be taxable, one of the ideas behind the Roth. This is from Pub. 590 http://www.irs.gov/publications/p590/ch02.html#en_US_2012_publink1000231084

Distributions After Owner's Death

If a Roth IRA owner dies, the minimum distribution rules that apply to traditional IRAs apply to Roth IRAs as though the Roth IRA owner died before his or her required beginning date. See When Can You Withdraw or Use Assets? in chapter 1.

Distributions to beneficiaries. Generally, the entire interest in the Roth IRA must be distributed by the end of the fifth calendar year after the year of the owner's death unless the interest is payable to a designated beneficiary over the life or life expectancy of the designated beneficiary. (See When Must You Withdraw Assets? (Required Minimum Distributions) in chapter 1.)

If paid as an annuity, the entire interest must be payable over a period not greater than the designated beneficiary's life expectancy and distributions must begin before the end of the calendar year following the year of death. Distributions from another Roth IRA cannot be substituted for these distributions unless the other Roth IRA was inherited from the same decedent.

If the sole beneficiary is the spouse, he or she can either delay distributions until the decedent would have reached age 70½ or treat the Roth IRA as his or her own.

[ldreyna]

tHANKS

[jainen]

>>inherited Roth IRA is not taxable<<

There is NO such rule in the tax code. Just like a traditional IRA, a Roth is income in respect of the decedent and taxed to the recipient exactly as it would have been to the original owner.

Because it went to a beneficiary, it is not subject to the 10% penalty for early withdrawal. That's why they used Code T. But to be non-taxable it must still be a qualified distribution, and nothing in the original post suggests that. It may be that the account had not yet met the five year period for establishing a Roth or the separate five year period for conversions. In that case, part of the distribution is indeed taxable!

[Margaret CPA in OH]

Thanks for the clarification, jainen. That's why I posted the pub info. with all the qualifications for the OP to determine how the situation at hand might fit. Admittedly I did not personally read all the details and used the word 'should' in my reply because I thought an idea behind the Roth was that the contributions were post tax and the earnings would be tax-free as well with the holding period. I will have to read ALL the fine print one day when I am faced with the OP's situation.

[jainen]

>>an idea behind the Roth was that the contributions were post tax<<

Generally yes, but remember that 2010 conversions weren't taxed until later, and 2012 is part of that later. 1099 codes are notoriously unreliable, because nobody else reads the fine print either, but for what it's worth the bank has told the IRS this was not a qualified distribution. The beneficiary will have to get information from the decedent's Form 8606.

[Margaret CPA in OH]

Ah, yes, those pesky conversions! Agreed much more info needed. So glad you are on the board.