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Level 2

Are the death benefits from a tax-deferred annuity held in a Roth IRA taxable to the beneficiaries, or are they tax free?

 
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Level 20

Are the death benefits from a tax-deferred annuity held in a Roth IRA taxable to the beneficiaries, or are they tax free?

The fact that the money being distributed from the Roth IRA came from an annuity death-benefit has no bearing on determining the taxable amount of the distribution.  If the distribution is a qualified Roth IRA distribution, the distribution is non-taxable.  Since the Roth IRA participant has died, the distribution is a qualified distribution if the distribution is made more than 5 years after the beginning of the year for which the participant first made a Roth IRA contribution.

 

If the distribution is not a qualified distribution because it has has not been 5 years since the beginning of the year for which the deceased participant first made a Roth IRA contribution, the taxable amount must be calculated on Part III of a Form 8606 with regard to only the Roth IRAs inherited by this beneficiary from this participant.  Along with the Roth IRAs, the beneficiary will have inherited a proportional amount of the participant's Roth IRA contribution and conversion basis to be used on Part III.

 

See Are Distributions Taxable in IRS Pub 590-B:

https://www.irs.gov/publications/p590b#en_US_2018_publink1000231057