@macuser_22
@fanfare
You didn’t read far enough. Keep going to “Distributions to beneficiaries”.
[Edited to add: The section below applies to inherited Roth IRA accounts, and not traditional IRA accounts.]
Distributions that aren't qualified distributions.
If a distribution to a beneficiary isn't a qualified distribution, it is generally includible in the beneficiary's gross income in the same manner as it would have been included in the owner's income had it been distributed to the IRA owner when he or she was alive.
If the owner of a Roth IRA dies before the end of:
-
The 5-year period beginning with the first tax year for which a contribution was made to a Roth IRA set up for the owner's benefit, or
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The 5-year period starting with the year of a conversion contribution from a traditional IRA or a rollover from a qualified retirement plan to a Roth IRA,
each type of contribution is divided among multiple beneficiaries according to the pro-rata share of each. See Ordering Rules for Distributions, earlier in this chapter under Are Distributions Taxable.
Example.
When Ms. Hibbard died in 2020, her Roth IRA contained regular contributions of $4,000, a conversion contribution of $10,000 that was made in 2016, and earnings of $2,000. No distributions had been made from her IRA. She had no basis in the conversion contribution in 2016.
When she established this Roth IRA (her first) in 2016, she named each of her four children as equal beneficiaries. Each child will receive one-fourth of each type of contribution and one-fourth of the earnings. An immediate distribution of $4,000 to each child will be treated as $1,000 from regular contributions, $2,500 from conversion contributions, and $500 from earnings.
In this case, because the distributions are made before the end of the applicable 5-year period for a qualified distribution, each beneficiary includes $500 in income for 2020. The 10% additional tax on early distributions doesn't apply because the distribution was made to the beneficiaries as a result of the death of the IRA owner.
