@mjc4maureen wrote:
Got it. Thanks. You possess the knowledge I don't have. I really appreciate your sharing. Three more questions if I may ask.
(1) Roth Inherited IRA - is tax free as long as fund is there longer than 5 years as I understand. So if my beneficiary withdraws all of it once on the 10th year, then it should pass 5 years mark therefore, all is tax free. In other words, no income tax needs to be reported, right?
(2) It sounds like my executor needs to file the year I die both the 1040 and the 1041 tax returns. Yes? And 1041 tax return only needs to be filed one time not every year thing because we only die once, right? In fact, these would be my last tax returns. No more after that.
(3) Does Turbo Tax Premier version enable us to file both Estate tax return (1041) and Income tax return (1040)?
P.S. Since I have been laughed by you guys about grandkids inheritance, I am thinking over a bit. Thanks guys.
[Edited, see below for correct answer.]
1. The 5 year rule applies once per individual (must be opened at least 5 years in your lifetime) and once per conversion. This clock does not reset for the beneficiaries. Suppose you opened IRA in 2020, did an IRA to Roth conversion in 2022, another conversion in 2028, and died in 2030. The contributions, conversions and earnings get allocated proportionally to the beneficiaries. Because you met the 5 year rule for the account in general, and you met the 5 year rule for the 2022 conversion, that part of the account is qualified for the beneficiaries. The 5 year rule for the 2028 conversion would be satisfied in 2033. And remember that the owner must withdraw contributions first, conversions second, and earnings last. That would mean that your beneficiaries could withdraw the balance attributed to the contributions and first conversion at any time without tax or penalty. If they withdraw the balance attributed to the 2028 conversion before 2033, they pay income tax. Then when they withdraw earnings, they are not taxed. The account would have to be closed out by 2040.
2. Your estate files an estate tax return if it ever has income. Most of the time, that just means once, if you have income after the date of your death. But many people have estates that last a long time and continue to earn money and file tax returns (Elvis Presley, Michael Jackson, many authors, etc.)
3. The form 1041 estate tax return can only be filed using Turbotax Business. The program is different from "home and business" and is only available as a CD or download for PC, there is no Mac or online version.
4. We aren't laughing about your grandkids, but we are pointing out that young adults are often irresponsible with money, and there are ways of putting a fence around the money (or part of the money) until they are more mature.
