Roth IRA inheritance limit

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skilari
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Roth IRA inheritance limit

Post by skilari »

My one remaining parent has a Roth IRA in the high 8 figures -- is there an upper limit to how much of this can be inherited by 3 adult children without inheritance tax? I am not asking about the 10 year distribution rule etc -- just whether some of this should be given as a gift prior to inheritance to avoid inheritance tax.
Geologist
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Re: Roth IRA inheritance limit

Post by Geologist »

I think your parent needs professional estate planning advice (i.e., an estate lawyer). Gifts above the annual exclusion limit ($18,000 per year per individual, so only as much as $36k per couple if the adult children are all married) will count against the estate tax limit (currently about $13.6 million) and it doesn't sound like that would make much of a dent in an 8-figure Roth account.
sailaway
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Re: Roth IRA inheritance limit

Post by sailaway »

There is no limit, but some may need to be liquidated to pay inheritance tax, depending on the full estate and provisions.
toddthebod
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Re: Roth IRA inheritance limit

Post by toddthebod »

skilari wrote: Tue Jul 09, 2024 5:47 pm My one remaining parent has a Roth IRA in the high 8 figures -- is there an upper limit to how much of this can be inherited by 3 adult children without inheritance tax? I am not asking about the 10 year distribution rule etc -- just whether some of this should be given as a gift prior to inheritance to avoid inheritance tax.
1. "High 8 figures" means you are already well into taxable estate territory. The Roth gets added to everything else in calculating the estate tax.

2. Gifts and inheritances share the same exclusion, so gifting the day before death is no different than leaving in the estate. (This is not true at the state level in most states with estate taxes, so if that's a concern, this may make gifting more attractive.)

3. The Roth is probably growing faster than the estate tax limit, another reason to gift now instead of waiting.

4. However, a Roth cannot be gifted, therefore the money would have to be taken out first.

Therefore, in the end, this is largely a tradeoff between tax-free growth in the Roth and higher estate taxes versus growth in a taxable brokerage for you and lower estate taxes. Given the size of the account, I would assume 23.8% as a capital gains rate, making leaving in the Roth more attractive.

You should make a spreadsheet. My gut feeling is that it will favor leaving the money in the Roth until 10 years after your parent dies versus taking out of the Roth, gifting now, and paying a lot more dividend and capital gains taxes.
LookinAround
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Re: Roth IRA inheritance limit

Post by LookinAround »

skilari wrote: Tue Jul 09, 2024 5:47 pm My one remaining parent has a Roth IRA in the high 8 figures -- is there an upper limit to how much of this can be inherited by 3 adult children without inheritance tax? I am not asking about the 10 year distribution rule etc -- just whether some of this should be given as a gift prior to inheritance to avoid inheritance tax.
In addition to federal, check on your state. Some states, like mine, have an estate tax that kicks in at a much lower number then federal. As in just $400K
Afty
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Re: Roth IRA inheritance limit

Post by Afty »

LookinAround wrote: Tue Jul 09, 2024 7:07 pm
skilari wrote: Tue Jul 09, 2024 5:47 pm My one remaining parent has a Roth IRA in the high 8 figures -- is there an upper limit to how much of this can be inherited by 3 adult children without inheritance tax? I am not asking about the 10 year distribution rule etc -- just whether some of this should be given as a gift prior to inheritance to avoid inheritance tax.
In addition to federal, check on your state. Some states, like mine, have an estate tax that kicks in at a much lower number then federal. As in just $400K
Some states also have an inheritance tax, which is different from estate tax.
terran
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Re: Roth IRA inheritance limit

Post by terran »

Are you sure you have the high 8 figures right? It would be quite challenging to be get up near $100 million in an IRA. I think Romney did it with some private equity shenanigans.
Gradient Descent
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Re: Roth IRA inheritance limit

Post by Gradient Descent »

terran wrote: Tue Jul 09, 2024 8:14 pm Are you sure you have the high 8 figures right? It would be quite challenging to be get up near $100 million in an IRA. I think Romney did it with some private equity shenanigans.
Peter Thiel has a Roth IRA with billions of dollars.
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gavinsiu
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Re: Roth IRA inheritance limit

Post by gavinsiu »

There is no upper limit to what you can inherited. However, the federal government will impose an estate tax. Estate tax exemption is currently about $13.61 million. This exemption can double for a couple, but the surviving spouse need to file for portability of the exemption within 2 years of the death to preserve the exemption. Your state may impose a different set of estate or inheritance tax.

One issue is that the exemption supposedly sunset in 2026, so that the exemption drops to around $5-6 million. No one knows if it will sunset or if the government will preserve the exemption. Assuming that the sunset do occur, there may be an opportunity to reduce estate tax by giving he money away to the heir before the exemption expires. A person can only give $18K per person, if you give more than $18K, it starts eating into the exemption, but you might be able to save estate tax by giving enough away to reduce the estate before it sunsets. The exemption you used up might expire any way.

If your parent have that much money, you should definitely hire an estate lawyer because this part is complicated and unless the boglehead member is an estate lawyer, they won't know either (note: I am not an estate lawyer).

This is not really an Roth ira question. You will hit the federal estate tax if the money is in taxable, roth, or traditional ira. The plus with Roth is that the money is tax free and even if you have to withdraw it within 10 years, it's still tax free.
carminered2019
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Re: Roth IRA inheritance limit

Post by carminered2019 »

High 8 figures in Roth ? this sounds like a troll post.
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Re: Roth IRA inheritance limit

Post by LadyGeek »

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Gradient Descent
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Re: Roth IRA inheritance limit

Post by Gradient Descent »

gavinsiu wrote: Tue Jul 09, 2024 11:04 pm
One issue is that the exemption supposedly sunset in 2026, so that the exemption drops to around $5-6 million. No one knows if it will sunset or if the government will preserve the exemption. Assuming that the sunset do occur, there may be an opportunity to reduce estate tax by giving he money away to the heir before the exemption expires. A person can only give $18K per person, if you give more than $18K, it starts eating into the exemption, but you might be able to save estate tax by giving enough away to reduce the estate before it sunsets. The exemption you used up might expire any way.
Why would the amount given away now not count toward the exemption limit on/after 2026?
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Re: Roth IRA inheritance limit

Post by gavinsiu »

Gradient Descent wrote: Wed Jul 10, 2024 5:52 am Why would the amount given away now not count toward the exemption limit on/after 2026?
This is just based o a few article read, but probably need to be confirmed with an estate lawyer. The current exemption is $13M and in 2026 it drops back to around $6M when the law sunsets. Let's say you have a $10M estate. If you died now, your heir gets your estate federal tax free (not factoring state since some state has their own estate or inheritance tax). If you died after 2026, you have to pay federal estate tax on $4M.

Let's say before 2026, you give your heirs a gift of $5M, this reduces your exemption by $5M - gift tax exemption. Now your exemption is only $8M, but in 2026, it drops back to $6M. Because you use the exemption before the it expires, it doesn't get counted. Of course, who knows if the law will sunset or if they will change the law.

One of the thing OP should check for is if a portability was file when the first parent died. Let's say the husband dies when the exemption is $13M and the portability is filed, the $13M remains on the books even if it later drops to $6M, so when the wife dies later when the exemption is $6M they would still have $19M of exemption. At least this is what I think happens, perhaps a estate lawyer expert can verify.

With tihis much money, the OP's parent should hire an estate lawyer.
toddthebod
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Re: Roth IRA inheritance limit

Post by toddthebod »

Gradient Descent wrote: Wed Jul 10, 2024 5:52 am
gavinsiu wrote: Tue Jul 09, 2024 11:04 pm
One issue is that the exemption supposedly sunset in 2026, so that the exemption drops to around $5-6 million. No one knows if it will sunset or if the government will preserve the exemption. Assuming that the sunset do occur, there may be an opportunity to reduce estate tax by giving he money away to the heir before the exemption expires. A person can only give $18K per person, if you give more than $18K, it starts eating into the exemption, but you might be able to save estate tax by giving enough away to reduce the estate before it sunsets. The exemption you used up might expire any way.
Why would the amount given away now not count toward the exemption limit on/after 2026?
See here: https://www.irs.gov/newsroom/final-regu ... after-2025

Basically, if you make gifts under the higher exclusion amount in effect now but greater than the future exclusion after it reverts, for the sake of those gifts the higher exclusion amount applies. That means that people with estates higher than the current lifetime exclusion (probably ~$14M next year) who can afford to do so are incentivized to give away that much in December 2025 if it turns out the estate tax exclusion is going to revert.
evancox10
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Re: Roth IRA inheritance limit

Post by evancox10 »

If it is really in the high 8 figures (meaning greater than $50 million), then you, or rather your parent, should be seeking top notch legal & estate planning advice from attorneys regarding this.

To answer your question, there is not a “limit” per se on what you can inherit, but it is almost certain that estate taxes will be owed given the amounts involved.

Gifting could save estate taxes in some situations depending on future changes to the estate tax, but gifts (above the annual exclusion amount) eat into the estate tax lifetime exclusion amount. So they are not a complete end run around estate tax.

However, if they have the cash outside of the Roth IRA to support it, your parent should probably be giving annually up to the exclusion amount to all 3 children, and the children’s spouses if applicable. Each annual gift of $108k could save $43k in estate taxes. More if there are grandchildren or great-grandchildren that they can also gift to. (If remaining parent has remarried, I believe the amount they could give doubles if they elect gift splitting. But this needs to be done correctly and the right forms filed with the IRS. Seek legal advice.)

If they don’t have the cash outside the Roth IRA to make such gifts, this becomes more complicated.
Last edited by evancox10 on Wed Jul 10, 2024 11:21 am, edited 1 time in total.
keystone
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Re: Roth IRA inheritance limit

Post by keystone »

terran wrote: Tue Jul 09, 2024 8:14 pm Are you sure you have the high 8 figures right? It would be quite challenging to be get up near $100 million in an IRA. I think Romney did it with some private equity shenanigans.
Considering how frequent mistakes are made when it comes to figures, it's a fair question.
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Re: Roth IRA inheritance limit

Post by Sandi_k »

gavinsiu wrote: Tue Jul 09, 2024 11:04 pm There is no upper limit to what you can inherited. However, the federal government will impose an estate tax. Estate tax exemption is currently about $13.61 million. This exemption can double for a couple, but the surviving spouse need to file for portability of the exemption within 2 years of the death to preserve the exemption.
According to our accountant, Form 706 must be filed within **15 months** of the original spouse's passing date, NOT two years.

The presumption is it should be filed within nine months of the death; if that cannot be accomplished, the estate must file a six month extension to get the full 15 months to comply.

When the surviving spouse passes, we are told that the full estate does not get a full step up basis, as the step up was claimed for the first-to-die. As such, only half of the estate will be stepped up - that of the second-to-die.
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Re: Roth IRA inheritance limit

Post by CAsage »

evancox10 wrote: Wed Jul 10, 2024 10:37 am However, if they have the cash outside of the Roth IRA to support it, your parent should probably be giving annually up to the exclusion amount to all 3 children, and the children’s spouses if applicable. Each annual gift of $108k could save $43k in estate taxes. More if there are grandchildren or great-grandchildren that they can also gift to. (If remaining parent has remarried, I believe the amount they could give doubles if they elect gift splitting. But this needs to be done correctly and the right forms filed with the IRS. Seek legal advice.)

If they don’t have the cash outside the Roth IRA to make such gifts, this becomes more complicated.
If the parent is over 59.5, all withdrawals are tax-free. I would withdraw the money from the Roth and give it annually, starting now, if no cash. The only downside is that the money then moves into the "taxable" world but they could work that (increase their own IRA, muni bonds etc)>
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Re: Roth IRA inheritance limit

Post by TomatoTomahto »

carminered2019 wrote: Tue Jul 09, 2024 11:59 pm High 8 figures in Roth ? this sounds like a troll post.
How likely is a troll first post from someone who just joined BH yesterday? Hmmmm.
I get the FI part but not the RE part of FIRE.
gavinsiu
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Re: Roth IRA inheritance limit

Post by gavinsiu »

TomatoTomahto wrote: Thu Jul 11, 2024 7:45 am How likely is a troll first post from someone who just joined BH yesterday? Hmmmm.
True, but I rather give people a benefit of the doubt, since it's not impossible to have a 8 figure IRA especially and the question isn't accusatory
carminered2019
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Re: Roth IRA inheritance limit

Post by carminered2019 »

gavinsiu wrote: Thu Jul 11, 2024 8:09 am
TomatoTomahto wrote: Thu Jul 11, 2024 7:45 am How likely is a troll first post from someone who just joined BH yesterday? Hmmmm.
True, but I rather give people a benefit of the doubt, since it's not impossible to have a 8 figure IRA especially and the question isn't accusatory
8 figure Roth is not hard but high 8 figure(80M+) in Roth puts you in a class of its own. Peter Thiel has more than 5B in Roth.
MoneyOCD
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Re: Roth IRA inheritance limit

Post by MoneyOCD »

If it is truly High eight digits - there could be a place for single premium life insurance or similar instrument. You really need to consult financial adviser. With such balance I bet your parent have access to the top ones in any wealth management groups.
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Re: Roth IRA inheritance limit

Post by SuzBanyan »

Sandi_k wrote: Thu Jul 11, 2024 1:19 am
gavinsiu wrote: Tue Jul 09, 2024 11:04 pm There is no upper limit to what you can inherited. However, the federal government will impose an estate tax. Estate tax exemption is currently about $13.61 million. This exemption can double for a couple, but the surviving spouse need to file for portability of the exemption within 2 years of the death to preserve the exemption.
According to our accountant, Form 706 must be filed within **15 months** of the original spouse's passing date, NOT two years.

The presumption is it should be filed within nine months of the death; if that cannot be accomplished, the estate must file a six month extension to get the full 15 months to comply.

When the surviving spouse passes, we are told that the full estate does not get a full step up basis, as the step up was claimed for the first-to-die. As such, only half of the estate will be stepped up - that of the second-to-die.
In 2022, the IRS extended the deadline to 5 years if you are filing only to elect portability:
“Executors filing to elect portability may now file Form 706 on or before the fifth anniversary of the decedent’s death.
An executor wishing to elect portability under this extension must state at the top of the Form 706 being filed that the return is “Filed Pursuant to Rev. Proc. 2022-32 to Elect Portability under section 2010(c)(5)(A).” For more information on this extension, see Rev. Proc. 2022-32.”
https://www.irs.gov/instructions/i706
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Sandi_k
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Re: Roth IRA inheritance limit

Post by Sandi_k »

SuzBanyan wrote: Thu Jul 11, 2024 2:59 pm
Sandi_k wrote: Thu Jul 11, 2024 1:19 am
gavinsiu wrote: Tue Jul 09, 2024 11:04 pm There is no upper limit to what you can inherited. However, the federal government will impose an estate tax. Estate tax exemption is currently about $13.61 million. This exemption can double for a couple, but the surviving spouse need to file for portability of the exemption within 2 years of the death to preserve the exemption.
According to our accountant, Form 706 must be filed within **15 months** of the original spouse's passing date, NOT two years.

The presumption is it should be filed within nine months of the death; if that cannot be accomplished, the estate must file a six month extension to get the full 15 months to comply.

When the surviving spouse passes, we are told that the full estate does not get a full step up basis, as the step up was claimed for the first-to-die. As such, only half of the estate will be stepped up - that of the second-to-die.
In 2022, the IRS extended the deadline to 5 years if you are filing only to elect portability:
“Executors filing to elect portability may now file Form 706 on or before the fifth anniversary of the decedent’s death.
An executor wishing to elect portability under this extension must state at the top of the Form 706 being filed that the return is “Filed Pursuant to Rev. Proc. 2022-32 to Elect Portability under section 2010(c)(5)(A).” For more information on this extension, see Rev. Proc. 2022-32.”
https://www.irs.gov/instructions/i706
That is excellent information, thank you!
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