Inherited IRA - how much RMD my beneficiaries must withdraw first year (i.e. the year I died) and subsequent 9 years?

[Opus 17]

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@fanfare wrote:

Like I said on another thread:

How am I supposed to know when my Inherited Roth IRA was initiated?

Is the custodian required to inform me?

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I don't know, since I am neither dead nor the beneficiary of a Roth IRA.  The custodian will know the date of the specific Roth IRA (that's what code J is for on the 1099-R).  I suppose it is up to the beneficiary to know if the decedent had already fulfilled the 5 year holding period with a different account.  This information probably needs to be in a "read after death" letter somewhere along with the account owner's computer passwords and life insurance policies. 

[Opus 17 · Accepted solution]

"What about my other questions from my previous email?"

This forum format does not lend itself to consolidated answers, unfortunately.  I have a regular life (more or less) and was not online as you posted your questions.

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@mjc4maureen wrote:

Great answers.  I never know there are many 5 years clocks running.  Now I know.   Thanks. 

And please correct me if I don't understand you right.  My Roth account was opened since 2005.  As I retired in 2015, after that, every year I did Roth conversion.  Say, I died in 2022 and the last Roth conversion I did was in 2022.   My beneficiaries must pay income tax for withdrawing the earning of the Roth Conversion portion which occurs between 2018 and 2022 and pay no 10% penalty.    

No, you misunderstood.  Each conversion has a 5 year clock, and you have a personal lifetime 5 year clock.  Based on this new (to me) information, you have already fulfilled your personal 5 year clock (in 2010).

Yes, Fidelity does keep track of the conversions, but the earnings from each conversion are not kept separate. You have three types of funds in your account, contributions, conversions, and earnings.  All earnings are counted together.

Because each conversion has its own 5 year clock, an account holder will pay the 10% penalty for early withdrawal if they withdraw that particular conversion money before its own 5 year clock is up, unless the person is exempt from the 10% penalty.  (Income tax is never owed when a conversion is withdrawn because the tax was paid at the time of the conversion.)   You are exempt from the 10% early withdrawal penalty if you are over age 59-1/2, and your beneficiaries are exempt from the 10% penalty because all beneficiaries are exempt from the penalty.

===>>>Bottom line is, because you opened your Roth in 2005, all withdrawals by your beneficiaries will be tax free no matter when you pass away or how long it was since the last conversion.  (It would have helped to know the 2005 date sooner.)

(The separate 5 year clock for each conversion only penalizes people younger than age 59-1/2 who misuse the Roth IRA by converting money and then withdrawing it.  Without that rule, you could dodge the 10% penalty on early withdrawal of a traditional IRA by converting to a Roth and then withdrawing from the Roth.  There is no 10% penalty for beneficiaries.)

[Opus 17 · Accepted solution]

@mjc4maureen 

With luck, I can wrap this up,  referencing your original question and the additional information you have added, and leaving out the mistake I made.

For your traditional IRAs, the accounts will be transferred to your beneficiaries as "inherited IRAs". They can rollover the money to a different broker if they like, but it must remain an inherited IRA (this designation will be applied by the broker).  They must withdraw the funds within 10 years, and pay regular income tax when they do so.  They have no other withdrawal requirement or schedule to follow, even if you have passed your RMD starting date before you died.

If you did not take your RMD for that year from a traditional IRA  before you died, the RMD must be calculated and distributed to your beneficiaries, who pay the income tax, before the remaining balance can be divided.  This is one of the duties of your executor, and your broker will certainly help.  The RMD does not go on your final tax return or on an estate tax return.  

For your Roth IRAs, since you opened your Roth IRA in 2005, you have already fulfilled your 5 year holding period.  Your beneficiaries will receive Roth IRA account also labeled as "inherited."  Your beneficiaries must withdraw all the funds within 10 years, there is no other required schedule.  All withdrawals by your heirs will be tax-free, regardless of the date of your death or any IRA to Roth conversions you have done recently.  Roth IRAs have no RMD requirement, so there is no "final RMD" needed for the year of your death. 

Once the beneficiaries withdraw the money (and pay tax, if it is withdrawn from a traditional IRA) they can do anything with the money that they want, it's all just money at that point.  They can contribute to a new IRA (if they have compensation from working) or they can invest in a broker account, or pay college tuition, or anything else that can be done with money.  The one thing they can't do is rollover or convert the inherited IRA into a regular IRA in their own name and keep the money for the rest of their lives.  They must withdraw all funds within 10 years. 

[mjc4maureen]

Got it.  No further questions.  I certainly got educated a bit with a delight.  Thank you so much for your patience and the knowledge.