Should I take a lump sum from a beneficiary Roth IRA?

[mplsjanedoe]

I now have a few Beneficiary Roth IRAs.  There is no extra fee from the financial institution to close the accounts, but they said to ask a tax advisory about the taxes before I do it.  I have several Beneficiary IRAs and annuities now and want to consolidate them a bit.  Is there a tax penalty for cashing out a beneficiary Roth IRA left to me by my father?  Or is it just taxed at a a higher rate based on my income being higher from that year as a result of the extra money and it is taxed normally?

[dmertz · Accepted solution]

You can only consolidate beneficiary IRAs that come from the same owner and for which the RMD is calculated the same way.  If they meet these requirements, the accounts can be transferred trustee-to-trustee into a single account.  They cannot be moved by distribution and rollover to another beneficiary Roth IRA.

If you do not need to spend the money, there is no reason to take more money from the beneficiary Roth IRAs than is required, allowing the remainder to continue to grow tax and penalty free.  (Distributions you make before 5 years after the beginning of the year for which your father first made a Roth IRA contribution are taxable to the extent that the distribution come from earnings in the account rather than from original contributions and conversions.  Distributions come first from original contributions and conversions, so it's unlikely that any amount would be taxable if you took only RMDs.)

You can also calculate the RMD amounts determined for each of the beneficiary Roth IRAs and take the combined total from any one of the beneficiary Roth IRA under the same restrictions under which you could consolidate these accounts.  This would allow you to drain one of the IRA accounts before the others even if you chose not to consolidate the accounts.

Be sure to name your own designated beneficiary(s) for the beneficiary Roth IRAs so that your beneficiary(s) can continue the RMD schedule that you are required to follow, otherwise, most Roth IRA custodial agreements require that the beneficiary Roth IRAs be distributed to your estate, ending the stretch.

These are all things that a competent tax advisor should make you aware of.

See IRS Pub 590-B, Distributions After Owner's Death:  https://www.irs.gov/publications/p590b/ch02.html#en_US_2015_publink1000231084

[mplsjanedoe]

Thank you dmertz!  Wonderful information and so helpful.  I am a little overwhelmed with having various accounts now at several different financial institutions and want less to keep track of.  I am also getting a little confused on if I will have to keep filing taxes for my deceased family members because the some of the accounts are set up as "estate of-----------" and want to get things a little more simple for myself.  Do I still file taxes for estate accounts that kick out RMD each year?

[dmertz]

Any IRA titled as "estate of ..." is not *your* beneficiary IRA, it's the estate's beneficiary IRA and the estate must remain open as long as the IRA is still titled in the name of the estate.  With the estate being the beneficiary of the IRA, RMDs from this account are *not* based on your life expectancy and cannot be combined with IRAs on which you were the designated beneficiary.  It should be possible to transfer the estate's beneficiary IRAs to the estate beneficiary(s) as successor beneficiary(s) (not designated beneficiary(s)), allowing the estate to be closed, but some IRA custodians resist, not understanding that the tax code allows for the transfer of the IRA to the successor beneficiary.  As long as the beneficiary is kicking out RMDs to the estate (which are and will continue to be based on the age of the deceased on the deceased's birthday in the year of death), the estate must file estate income tax returns (assuming that the amount exceeds the estate income tax exclusion amount of $600).

[BobM1]

There is insufficient info to guide you to the best strategy. We'd need to know your tax rate, age,  your expectation as to future earnings/tax bracket, etc. Plus, TurboTax does not provide financial advice such as this.