Help with Inherited Roth, no will no beneficiary

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DJInvestor
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Joined: Tue Jul 22, 2014 4:10 pm

Help with Inherited Roth, no will no beneficiary

Post by DJInvestor » Wed Dec 06, 2017 3:54 pm

My 24 year old son was killed in an accident in August. He was an amazing young man, brilliant, passionate and caring. Losing him has been incredibly difficult.

I seek input from the Boglehead community about how to handle his Roth IRA held at Vanguard. I get different answers from Vanguard, the estate attorney, and my CPA, but they all agree that I should proceed with caution.

Unfortunately, my son had no will and had not bothered to designate a beneficiary for his Roth account. Under state law (NC), a Roth IRA with no beneficiary designated becomes part of the estate. Thus, the Roth IRA has been transferred as an inherited Roth IRA to a new account titled in the name of "The estate of ***decedent***".

Probate law in NC apparently dictates that as his sole surviving parent, I have to inherit my son's estate.

With an inherited Roth, I have to either take RMDs, which I don't want, or I have to cash out the Roth within 5 years.

What I would like to do is to cash out the Roth IRA in a manner that avoids taxes on capital gains. I have decided not to hassle with the RMDs that would be required if I keep the funds in an inherited Roth. Ultimately I would like the assets to go to my other child to help fund her own investment account.

My son's last contribution was May 15, 2014. Thus, after May 15, 2019, all contributions will have met the 5 year rule. He has about $8,100 in contributions and the current value is around $12,500. My tax bracket is 33%. The total value of his estate is around $35,000.

My questions are:
1. Is it correct that I can take a lump sum distribution from the Roth after May 15, 2019 with no tax consequences?
2. Is there any downside to keeping the estate open for another year and a half while I wait for the 5 year contribution limit?
3. Would there be any benefit to me "disclaiming" the inherited Roth and having it pass directly to my 21 year old daughter, given that she will cash it out in any case so as to avoid having to deal with numerous small RMDs over her very long actuarial lifetime?
4. I read the rules to say that EITHER 1) I have to take a RMD by the end of the year after the year of his death, OR, 2) I have to liquidate the account within 5 years after the year of his death. Did I get this right? If so, then it will be simplest to just liquidate the account after May 15, 2019.

Thanks for your help in dealing with this unusual situation.

DJ

aristotelian
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Joined: Wed Jan 11, 2017 8:05 pm

Re: Help with Inherited Roth, no will no beneficiary

Post by aristotelian » Wed Dec 06, 2017 4:25 pm

Wow, very, very sorry for your loss.

It seems to me that you have the options all correct. I kind of like the idea of disclaiming it so your other child inherits. If you want the money to go to her anyway, it keeps you out of it and let's her decide what to do with it.

One benefit of this is if she keeps it in the account, keep in mind that it could grow faster than the RMD's for much of her life. For example, the market went up 20% this year while her RMD probably would have been only 2% or so. It is possible the balance could reach $50K or more before her RMDs start catching up to the market gains. I also kind of like the idea of her brother giving her a little something every year for the rest of her life.

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Epsilon Delta
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Re: Help with Inherited Roth, no will no beneficiary

Post by Epsilon Delta » Wed Dec 06, 2017 4:42 pm

Sorry for your loss. Completely inadequate though that may be.
DJInvestor wrote:
Wed Dec 06, 2017 3:54 pm

My son's last contribution was May 15, 2014. Thus, after May 15, 2019, all contributions will have met the 5 year rule. He has about $8,100 in contributions and the current value is around $12,500. My tax bracket is 33%. The total value of his estate is around $35,000.
In this case it's the first contribution that matters. Once the first contribution is five years old, and a qualifying event occurs (death of the account owner is a qualifying event) all distributions from the Roth are qualified which makes them tax and penalty free, you don't even have to report them. The first contribution is certainly no later than the May 15 2014 contribution, but if you have the records it may be in an earlier year. If the first contribution was in 2012 or earlier the account is qualified now.

Also the five years are five calendar years, the particular day of the year does not matter. If the first contribution was May15 2014 the account is qualified on Jan 1 2019.

Spirit Rider
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Re: Help with Inherited Roth, no will no beneficiary

Post by Spirit Rider » Wed Dec 06, 2017 4:46 pm

It is also the tax year of the contribution. So if the first contribution was on April 15, 2014 for the 2013 tax year, the Roth IRA is qualified on January 1, 2018.

Note: RMDs are not an option if there were no beneficiaries unless the decedent was married,

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Epsilon Delta
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Re: Help with Inherited Roth, no will no beneficiary

Post by Epsilon Delta » Thu Dec 07, 2017 1:06 am

I came back to edit my post and see Spirit Rider beat me to it.

What I was going to say is that since the last contribution was in (and for) 2014 and the total contribution of $8,100 was more than the yearly contribution limit is likely that a contribution was made for 2013 (or earlier) In that case the Roth will be qualified by Jan 2018. So no particularly long delay would be needed if DJInvestor just wants to close out the estate and move on.

DJInvestor
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Re: Help with Inherited Roth, no will no beneficiary

Post by DJInvestor » Thu Dec 07, 2017 9:39 am

Many thanks to Aristotelian, Epsilon Delta, and Spirit Rider for their incredibly helpful replies. I knew that the Boglehead hive mind would have answers.

My son's first Roth contribution was in Feb, 2013 for 2012 earnings, therefore it appears that all distributions will already be qualified. I will proceed with distributing the Roth into a taxable brokerage account at Vanguard in my daughter's name, though for practical reasons this won't be possible until January, 2018.

I do like Aristotelian's idea of having my son's Roth provide a gift to my daughter every year for the rest of her life. However, with the gift comes responsibility to make the RMD's every year, and the consequences for doing it wrong or forgetting to do it are rather severe. Moreover, Spirit Rider indicated that RMDs are not even an option, as my son was never married and there were no beneficiaries designated.

My idea is that the distributed taxable brokerage assets will be invested aggressively, 100% VTSAX, and held for decades. Alternatively, my daughter can build her own Roth space once she has earned income, and these funds can be used to support her Roth contributions. That will provide an enduring gift from my son to my daughter.

DJ

bsteiner
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Re: Help with Inherited Roth, no will no beneficiary

Post by bsteiner » Thu Dec 07, 2017 10:06 am

Since it's a Roth, and since the stretch isn't available, the decision to accept or disclaim is the same for the Roth as for his other assets.

Spirit Rider
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Re: Help with Inherited Roth, no will no beneficiary

Post by Spirit Rider » Thu Dec 07, 2017 10:55 am

I would not distribute the Roth assets to your daughter in a lump sum. While lifetime RMDs are not a possibility, the five-year rule is available. The executor should be able to do a direct rollover of the of the Roth IRA to an Inherited IRA for your daughter.

This allows her to at least get tax free earnings until 12/31 of the fifth year following the year of your son's death. During that time she will be able to make six (6) tax-free distributions to enable making her own Roth IRA contributions. If there is additional money, she could do the same for other tax advantaged accounts. If any funds are to be distributed to be invested in taxable accounts those distributions should wait until the last month (not day) of the last year allowed.

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