What are the negatives of inheriting a Roth IRA - if any? (Non Spousal)

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EyeYield
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What are the negatives of inheriting a Roth IRA - if any? (Non Spousal)

Post by EyeYield » Sun Dec 17, 2017 10:38 am

I'm starting a Roth conversion and want my early twenties nephews to be equal co-beneficiaries. As I understand it, they will have three options. They can choose to let it grow tax free, but not contribute to it, choose to take yearly RMDs tax free or take the whole thing after 5 years tax free. Do I understand this correctly?

This will be the smallest asset in my estate. My nephs will also be a part of a much larger Trust that they won't have total control over right away (their folks should provide enough to cover their lifetimes, their portion of my Trust is designed to be a back up in case they blow it).

I want them to have something right away to do with as they please, whether they take it over time or all at once, it doesn't matter. A Roth seems to be a simple, flexible vehicle to accomplish this.
It may prove to be educational for them too, who knows.

Any potential downside (for them) and am I missing anything?
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retiredjg
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Re: What are the negatives of inheriting a Roth IRA - if any? (Non Spousal)

Post by retiredjg » Sun Dec 17, 2017 10:58 am

I don't know of any downside for them. I'm not sure you have the options right though. They don't get to let it ride indefinitely. If they do not take the RMDs as scheduled, they must take it all out at 5 years. The other option is to take RMDs. That's how I understand it anyway.

http://fairmark.com/retirement/roth-acc ... -roth-ira/

There could be a downside for you though. If you are in a higher tax bracket and pay higher taxes at conversion than your heirs would pay if they inherited a tIRA.

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Flobes
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Re: What are the negatives of inheriting a Roth IRA - if any? (Non Spousal)

Post by Flobes » Sun Dec 17, 2017 11:01 am

EyeYield wrote:
Sun Dec 17, 2017 10:38 am
As I understand it, they will have three options. They can choose to let it grow tax free, but not contribute to it, choose to take yearly RMDs tax free or take the whole thing after 5 years tax free. Do I understand this correctly?
Not quite right. Read the wiki:
Inheriting a Roth IRA

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Re: What are the negatives of inheriting a Roth IRA - if any? (Non Spousal)

Post by DrGoogle2017 » Sun Dec 17, 2017 12:16 pm

There is a third option is to take it as lump sum.

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celia
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Re: What are the negatives of inheriting a Roth IRA - if any? (Non Spousal)

Post by celia » Sun Dec 17, 2017 12:26 pm

EyeYield wrote:
Sun Dec 17, 2017 10:38 am
I'm starting a Roth conversion and want my early twenties nephews to be equal co-beneficiaries. As I understand it, they will have three options. They can choose to let it grow tax free, but not contribute to it, choose to take yearly RMDs tax free or take the whole thing after 5 years tax free. Do I understand this correctly?
This isn't quite right. When they receive it, it will be an Inherited Roth IRA. There will be no taxes due on any withdrawals if the account has been open 5 years. But starting in the year after death, they have to take RMDs each year based on their own life expectancies. (The table for Inherited IRAs force a draw down quicker than if it was their own IRA.) They can always take out more than the minimum. They can even withdraw and spend it all in the year they receive it.

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Re: What are the negatives of inheriting a Roth IRA - if any? (Non Spousal)

Post by livesoft » Sun Dec 17, 2017 12:28 pm

EyeYield wrote:
Sun Dec 17, 2017 10:38 am
... or take the whole thing after within 5 years tax free.
The lump-sum option is just a subset of the above. One can make partial withdrawals throughout the 5 years. If any annual withdrawal is less than the RMD in the first 5 years, then one is using the 5-year plan. Of course, if all the annual withdrawals at least cover the annual RMD, then one doesn't have to take it all out within 5 years nor does one have to make sure the Roth lasts longer. For instance, one can do at least RMDs for 5 years, then in the 6th year withdraw the remaining value of the inherited Roth. Or at least RMDs for 9 years, and withdraw the remaining value in year 10.

But once past 5 years, one had better make sure they withdraw at least the RMD annually just like they were sure they did it the first 5 years.
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Re: What are the negatives of inheriting a Roth IRA - if any? (Non Spousal)

Post by Hug401k » Sun Dec 17, 2017 1:23 pm

I inherited a regular IRA- non spousal. I enjoy my annual RMD, paid out on my birthday (per my election) Fidelity does it all automatically for me, including the calculation, so it's painless.

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Re: What are the negatives of inheriting a Roth IRA - if any? (Non Spousal)

Post by HIinvestor » Sun Dec 17, 2017 1:43 pm

Agree that if you’re at a high tax bracket, you and your CPA may want to run the calculations to determine whether or not converting tIRA to Roth makes fiscal sense. For sone folks and situations it does—for others it really doesn’t. It doesn’t fit us.

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Re: What are the negatives of inheriting a Roth IRA - if any? (Non Spousal)

Post by EyeYield » Sun Dec 17, 2017 4:21 pm

Thanks to EVERYONE for correcting my understanding and to celia and livesoft for breaking it down so even I could understand it.

I'm just beginning this conversion now, to the top of my tax bracket, and will convert as much as possible before I begin my RMD's in four and a half years.
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Re: What are the negatives of inheriting a Roth IRA - if any? (Non Spousal)

Post by Alan S. » Sun Dec 17, 2017 5:01 pm

If a beneficiary does not elect the 5 year rule, because Life expectancy is the default rule under VG and almost all IRA custodian's beneficiary clause, the 5 year rule is not necessarily triggered. IRS PLR 2008-11028 concluded that the missed LE RMDs can be made up and the beneficiary can continue LE RMDs going forward.

In making up the missed RMDs, the beneficiary would owe the 50% penalty for missing the LE RMD, but the IRS has apparently been granting the penalty waiver as well as long as the proper 5329 is filed citing a reasonable cause for being late.

As is the case for any non spouse multiple beneficiary situation, the key deadline for creating a separate inherited IRA for each beneficiary is 12/31 of the year following the year of owner's death. If this deadline is missed, the youngest beneficiary will have to take RMDs using the age of the oldest.

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Re: What are the negatives of inheriting a Roth IRA - if any? (Non Spousal)

Post by bsteiner » Sun Dec 17, 2017 5:06 pm

If they need money, the trustees could make distributions to them out of the nonretirement assets so far they don't have to take more than the required distributions from the retirement assets.

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EyeYield
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Re: What are the negatives of inheriting a Roth IRA - if any? (Non Spousal)

Post by EyeYield » Sun Dec 17, 2017 8:40 pm

Alan S. wrote:
Sun Dec 17, 2017 5:01 pm
If a beneficiary does not elect the 5 year rule, because Life expectancy is the default rule under VG and almost all IRA custodian's beneficiary clause, the 5 year rule is not necessarily triggered. IRS PLR <a href="tel:2008-11028">2008-11028</a> concluded that the missed LE RMDs can be made up and the beneficiary can continue LE RMDs going forward.

In making up the missed RMDs, the beneficiary would owe the 50% penalty for missing the LE RMD, but the IRS has apparently been granting the penalty waiver as well as long as the proper 5329 is filed citing a reasonable cause for being late.

As is the case for any non spouse multiple beneficiary situation, the key deadline for creating a separate inherited IRA for each beneficiary is 12/31 of the year following the year of owner's death. If this deadline is missed, the youngest beneficiary will have to take RMDs using the age of the oldest.
Alan S.,
Thanks for the navigation through the IRS weeds on this subject, much appreciated. I'm just now reading Retire Secure! by James Lange and he is touching on some of this very information. The way things are going, he may have to release a new edition for 2018.
bsteiner wrote:
Sun Dec 17, 2017 5:06 pm
If they need money, the trustees could make distributions to them out of the nonretirement assets so far they don't have to take more than the required distributions from the retirement assets.
Thanks, Hopefully their parents will have this type of expense covered through their trust or, if still living, out of pocket. I'm hoping the inherited Roth will serve as something "extra" for the kids.
"The stock market is a giant distraction from the business of investing." - Jack Bogle

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