Advanced Underwriting Consultants

Question of the Day – July 19

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client has inherited a Roth IRA from her father.  The decedent had only just created his first Roth—this one—with a deposit shortly before his death.  Should my client cash out of the Roth?

Answer: If the beneficiary does not need the money, she’s probably better off to stretch the payout based on her life expectancy.

Qualified distributions from a Roth are tax free.  In this case, all distributions from the inherited Roth account would be tax free after the fifth calendar year, the first of which would be the year of the decedent’s first deposit.  While RMD distributions before that time would be nonqualified, they would most likely be a tax-free return of principal.

The real benefit of stretching the Roth is that the inherited account will continue to grow tax-free, and all distributions after the fifth year will also be tax free.  There’s probably no investment that the beneficiary can buy on her own that will produce such tax-advantaged cash flow.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.