Inheritance-related IRA

[sonya341]

How do I handle funds received from my deceased brother's retirement account that were transferred to a decedent Roth IRA and then distributed to me in 2022?

[LarryL20]

From IRS Publication 590-B, distributions received from this inherited IRA, from your deceased brother's retirement account, may be considered taxable income to you.  Since this IRA is a ROTH IRA, a certain portion of the distribution will be considered non-taxable income since the ROTH IRA contributions were not deductible by your brother.  However, any interest, dividends, and other income earned on these contributions will be considered taxable income.  In the beginning of 2023, you will receive Form 1099-B from the bank/investment firm that paid the distribution from your brother's retirement account.  This form will report the total distribution and also provide the taxable portion of the total distribution so that you can report correctly on your tax return.

[OpeA1]

Hello!

Please read this link  Retirement Topics - Beneficiary as rules are different depending on the source of the funds.

Here is the section that may pertain to your situation: 

"Inherited from someone other than spouse. If the inherited traditional IRA is from anyone other than a deceased spouse, the beneficiary cannot treat it as his or her own. This means that the beneficiary cannot make any contributions to the IRA or roll over any amounts into or out of the inherited IRA. However, the beneficiary can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of the beneficiary.

Like the original owner, the beneficiary generally will not owe tax on the assets in the IRA until he or she receives distributions from it."

I hope this helps!

"

[Joe_D-CPA-PFS-CFP]

Hello sonya341,

Thank you for the question.  I need some additional information please. In general, Qualified ROTH IRA distributions are not taxable and Non-Qualified ROTH IRA distributions can be taxable. To determine whether or not the distribution may be taxable, can you provide the answers to these questions:

• Were you the sole designated beneficiary on the ROTH IRA?
• Did you roll your brother's ROTH IRA to a beneficiary ROTH IRA?
• Was the entire ROTH IRA distributed to you in 2022?

Please answer these questions for clarification. However, If you take an immediate distribution from an inherited Roth IRA, the following applies:

• Distribution of all amounts except earnings: Tax Free and penalty free. These amounts are distributed first.
• Distributions of earnings.  Penalty free. Taxable only if it has been less than 5-years since the Roth IRA owner funded the Roth IRA. You count the 5-year period from the owner- the beneficiary inherits the 5-year start date from the Roth IRA owner.