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M*: Pulling Money From Your Roth IRA? Read This First
Understanding Roth IRA Inheritance: Q: If my spouse passed away and I transfer his ROTH IRA into my own new ROTH. Does a new 5 year window start. If I then pass away 1 year later how are my Beneficiaries treated and what options do they have?
This is a confusing topic because you can either continue as beneficiary, or assume ownership and roll into your own Roth IRA. The best decision depends on your age, the age of the Roth, and how much money you need from it before you reach 59.5. If you assume ownership of the inherited Roth, you are treated as if you were the owner from Day 1. The 5 year holding period starts in the year your spouse first contributed, but then you must also be 59.5 before your distributions are qualified. If you already had your own Roth IRA, you could combine the Roths and the 5 year holding period is treated as starting with the first contribution either one of you made. If you then pass, your beneficiaries continue to treat the holding period as starting the same time your holding period started. But they do not have to wait until 59.5 as that non spouse inherited Roth would be fully qualified after 5 years starting with your holding period. However, your non spouse beneficiaries will have annual RMDs and if they create separate inherited Roth IRA accounts before the end of the year following the year of your death, they can each use their own age to calculate the RMDs.
also, the order of Roth IRA withdrawals:
Your balance in regular Roth contributions can be withdrawn tax and penalty free any time. After all your regular contributions have been withdrawn, additional distributions must come from your conversions, oldest conversions first. If you get to conversions less than 5 years old, you owe the 10% recapture tax on the taxable portion of those conversions. Earnings come out last. To properly report any of these distributions on Form 8606, you must have kept track of your regular and conversion balances.
finally, a good strategy for Roth Conversions:
Having a separate account for each conversion makes the recharacterization process simpler, but if you is going to invest the accounts in the same investments, it is probably not worth the trouble. The number of accounts is not a factor for taxation of withdrawals since for those purposes all Roths are treated as one combined account regardless. All Roths are fully qualified and tax free after 5 years from the first contribution and age 59.5. But before the Roths are qualified, there is a 5 year holding requirement for each conversion that will end when one reaches 59.5, if 59.5 comes sooner. If one withdraws conversion money before 5 years or 59.5, he/she will owe a 10% penalty on the conversions withdrawn. Roth IRA ordering rules apply with respect to which portion of the Roth comes out first. If one is already 59.5, the conversion 5 year holding period does not apply, but 5 years must still pass before any earnings will be tax free.
One of my kids is househunting (or condo) and going to tap into her Roth and possibly her rollover for downpayment, so I am carefully reading all of these regs for 'first-time' homebuyers.
I read your fatherly advice (M* comment) and also read this other M* comment added below. There's something about home ownership that goes far beyond the numbers, but it's also nice to have the numbers work in your (daughters) favors. Good luck!
When I bought my first home 4 years ago, I withdrew my contributions plus $10K from my Roth to help get me a 20% . While it would have been nice to keep that $44K total in the IRA, I do not regret it for a moment.
Effectively, I was just moving my retirement investment into another form - a home of my own. Since then, I've paid $30K to the principal, instead of that money going to a landlord. My home has appreciated considerably in value, and my monthly mortgage on a 3 bedroom house is apparently slightly less than the average monthly rental for a 1 bedroom apartment in the same area.
I seem to remember an article from back when J. Clements was writing for the WSJ. It said in essence that buying a home should not be considered an investment and that all things considered, housing costs way more than one should reasonably expect to get in return.
You obviously have suppleness and emotional understanding as a parent.
Yeah, I am not considering this as an investment except perhaps at the lower levels, and think that the 'effectively' person is mostly rationalizing.
Depends on the RE market too, of course. For my kids I looked back 45y and ownership of three houses in the Boston suburbs and calculate that the total return had been (only) ~7.5% per year, and that in a time of hugely rising house pricing. (And flat the last decade for this last house we are in, so ~9% before that. I am, without any foundation, positing that the tax breaks are a wash against mortgage costs, repairs, taxes, etc.).
Regardless, none of this strategy of hers is ideal, and I myself would have advised her to keep on renting and saving. But that is not such a prudent option, really, for a variety of the usual reasons (age and life stage, marriage and children planning, in-laws' needs, etc.).
The charge of horrible 'don't ever do that, you dope' financial misplanning just seemed so wack, not to say offensive, to me. As though Benz shoulda been prevented from writing the article in the first place.
Comments
Some additional notes I have been accumulating regarding Roth IRA's mostly from Ed Slott"s Discussion Forum here:
Discussion Forum:
Understanding Roth IRA Inheritance:
Q: If my spouse passed away and I transfer his ROTH IRA into my own new ROTH. Does a new 5 year window start. If I then pass away 1 year later how are my Beneficiaries treated and what options do they have? also, the order of Roth IRA withdrawals: finally, a good strategy for Roth Conversions:
Tax Treatment of Roth IRA:
investopedia.com/articles/retirement/03/030403.asp
http://www.investopedia.com/university/retirementplans/rothira/rothira3.asp?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186
http://news.morningstar.com/articlenet/article.aspx?id=804419
Regards,
Ted
http://www.marketwatch.com/story/think-of-your-home-as-a-place-to-live-not-an-investment-2014-12-30/print
You obviously have suppleness and emotional understanding as a parent.
Yeah, I am not considering this as an investment except perhaps at the lower levels, and think that the 'effectively' person is mostly rationalizing.
Depends on the RE market too, of course. For my kids I looked back 45y and ownership of three houses in the Boston suburbs and calculate that the total return had been (only) ~7.5% per year, and that in a time of hugely rising house pricing. (And flat the last decade for this last house we are in, so ~9% before that. I am, without any foundation, positing that the tax breaks are a wash against mortgage costs, repairs, taxes, etc.).
Regardless, none of this strategy of hers is ideal, and I myself would have advised her to keep on renting and saving. But that is not such a prudent option, really, for a variety of the usual reasons (age and life stage, marriage and children planning, in-laws' needs, etc.).
The charge of horrible 'don't ever do that, you dope' financial misplanning just seemed so wack, not to say offensive, to me. As though Benz shoulda been prevented from writing the article in the first place.