Income Tax (or any Tax) on Inherited Roth IRA?

[gotnukes8]

Recently my grandmother passed away and left her Roth IRA to me as the beneficiary. My understanding is that because of her age (80) and the fact that her Roth IRA was over 5 years old, that any distribution I take from my recently established Inherited Roth IRA, will be tax-free. Meaning I will not pay any income tax (or otherwise) on any distribution I take. From what I read, if I were to transfer all of the money out, I will receive a 1099-R and that it should indicate inherited Roth IRA and therefore, it will not be used as taxable income when I file my taxes next year.  Is this correct? 

THANKS!!!!

[macuser_22]

Correct.  An inherited Roth IRA under those circumstances is a qualified tax free distribution but the 1099-R must still be reported on the beneficiaries tax return.

[gotnukes8]

Thank you for the confirmation! I just wanted to check before I made any decisions on what to do with it. 

[dmertz]

Some custodians use code T instead of code Q when reporting such distributions on Form 1099-R, but since you know that it has been more than 5 years since the Roth IRA was established, code T gets the same tax treatment as code Q, entirely nontaxable and reported only on Form 1040 line 4a, not on From 8606.  In TurboTax, is asked, indicate that the taxable amount of this distribution is $0.

[fanfare]

@dmertz  According to Pub 590B, "after the death of a Roth IRA owner, certain of the minimum distribution rules that apply to traditional IRAs also apply to Roth IRAs as explained later under Distributions After Owner's Death."

Go there and you're referred to "When Can You Withdraw or Use Assets?"

Go there and I can't see anything relevant that tells which rule(s) would apply to non-spouse inherited Roth IRAs if the Owner dies after 70 1/2 (yet treating the IRA as if the owner died before 70 1/2) .

As far as I can tell, I must use the divisor based on my own age. But that was already the rule.

[dmertz]

Remember that Roth IRAs are IRAs, so Roth IRAs are subject to the same RMD rules as are traditional IRAs.  However, because Roth IRAs do not have a Required Beginning Date for the participant to begin RMDs, a Roth IRA participant is always considered to have died before the RBD and the age of the Roth IRA participant is irrelevant to determining RMDs.  The rules for determining RMDs when the participant's dies before RBD are the 5-year rule or the distributions over the life-expectancy of the designated beneficiary, and, if the designated beneficiary is the spouse of the participant, the spouse can roll the money over to their own Roth IRA and avoid beneficiary RMDs altogether.  If the beneficiary is not an individual (such as is the case when the beneficiary is the estate of the decedent), the 5-year rule always applies (because only an individual has a life expectancy).

Note that the original question above asked nothing about determining RMDs.  It asked about the taxable amount of a distribution.  Whether or not a distribution to a beneficiary is a qualified distribution is determined only by the amount of time that has elapsed between the beginning of the year for which the participant (grandmother, in this case) first made a Roth IRA contribution and the date of the distribution.  Since more than 5 years had elapsed in this case, the distribution is a qualified distribution.  My previous post was only to point out that in preparing Forms 1099-R some custodians of inherited Roth IRAs don't bother to consider the year for which the participant first made a Roth IRA contribution even if they know it, and use code T exclusively.

[macuser_22]

Also note that the original questions said that *all* the Roth money was being distributed so any RMD considerations are a moot point.

[fanfare]

I do note that the original question asked nothing about determining RMDs.

However the original poster might, on reflection, or with further information decide to take RMDs rather than all at once.

In any case thanks for your elucidating reply, dmertz.