I have a client who has inherited a Roth IRA from her father. Unfortunately, her father did not live the full five years after rolling his IRA into a Roth and paying the taxes on the rollover.
Merrill Lynch has told my client they cannot provide her with the income that needs to be picked up nor whether a distribution has to be made the year of his demise.
Can you please provide me with any guidance regarding a) whether a distribution has to made the year of the death, b) how to obtain the amount of income that should be reported in 2017, and c) what to tell Merrill Lynch? Thank you.
No RMD needs to be made in the year of the death of the Roth IRA owner because there are no RMDs to Roth owners.
The RMDs to the client will depend on whether or not the client was a named the beneficiary on the beneficiary form or if they inherited through the estate. A named beneficiary has an RMD beginning the year after the death of the Roth owner. It is calculated based on the age the beneficiary turns that year and the corresponding factor from the Single Life Expectancy Table. A beneficiary who inherits through the estate will have to empty the Roth IRA within five years. There is no RMD until the fifth year when the remaining balance is the RMD. Any amount can be withdrawn in years 1-4.
Roth basis, income, and 5-year holding periods are tracked by the Roth owner, not by the custodian. There are ordering rules for Roth distributions. All Roth accounts are considered one account. The first funds out will be annual contributions, then conversions and lastly earnings. If the client takes only RMDs, they generally will not come out of earnings. The 5-year holding period will be the time the Roth owner held the account and the time the beneficiary holds the account. If the beneficiary does not take more than contributions and conversions before the 5-year holding period is satisfied, they will not owe tax on any distributions.
Form 8606 will have to be filed with your tax return to show the Roth distributions.
I will turn 70 ½ years old in January 2018. I understand I need to start taking my RMDs in 2018. In one of your recent articles you mentioned that you use your age as of December 31 to determine the divisor from the life expectancy tables. Since I will be 71 on Dec. 31, 2018, will I use the divisor for age 71 or the divisor for 70 (my age on Dec. 31, 2017). I recently heard a financial advisor on the radio talking to a man with the same issue (turning 70 1/2 in 2018) and he told him he needed to take 2 RMDs in 2018 (I’m assuming one for the age 70 divisor and one for the age 71 divisor). Do I need to take two RMDs? Which divisor am I supposed to use for a single RMD? I want to make sure I’m not penalized for not taking the correct amount and don’t want the tax impact of two RMDs. Please advise.
This is a very confusing area for many people, including advisors. You are turning 70 ½ in January 2018. Your first RMD is due for 2018. You will be 71 at the end of 2018. So, you will use the factor for a 71-year old and your 12/31/17 account balance to calculate your 2018 RMD. You don’t actually have to take that RMD until 4/1/2019. If you wait until 2019 to take your 2018 RMD, then you will have to take two RMDs in 2019 – one for 2018 and one for 2019. Hope this helps.