My ex-husband died in 2017. We were divorced for over 40 years. I was still listed as a beneficiary. Roth started a long time ago. My accountant told me that I should withdraw the RMD since I was 72 in 2022. I received a Form 1099R showing a distribution of $4,310 and federal income tax withheld of $862. Why should I pay tax?
CW:
Dear CW,
Yes, $862 is exactly 20% of $4,310, and 20% is the usual default withholding percentage found on distribution request forms. In fact, it is the required default percentage of distributions from some retirement accounts. You should be able to specify the interest rate for any future distributions. In most cases, the hold can be set to zero.
If the funds came from a Roth IRA, they are likely not taxable, since I assume “…long ago” means more than five tax years before his death. If that’s the case, you should get the $862 back either by reducing the check you wrote when you file your 2022 return, or you should get a refund by adding a refund. If you’ve already filed, you can file a completed return to get it back.
You would have inherited this account under the 2017 rules. Because you were not married when he died, you were a non-spouse beneficiary. Before 2020, Roth accounts inherited by non-spouses from deceased taxpayers are subject to Required Minimum Distributions (RMD) each year, regardless of the beneficiary’s age. Therefore, you should have taken RMDs based on your life expectancy starting in 2018 and continuing as long as you have a balance. The recently established 10-year rule does not apply.
If he died in 2020 or later, the new 10-year rule would apply. Under that rule, no annual RMD is payable on inherited Roth IRAs, but the account must be completely empty by the end of the 10th year following the year of death.
You weren’t her spouse, but I will point out that spouses have options that no one else gets when inheriting retirement accounts, IRAs, and Roth IRAs. For example, only surviving spouses can take the funds into their own retirement account, IRA, or Roth IRA, not as an inherited retirement account, inherited IRA, or inherited Roth IRA. In other words, if you’re married and you name your spouse as the beneficiary of your IRA, he can roll over the funds to his personal IRA when you die. From then on, the funds are treated as if they were always his. While not generally the best choice, this is the most common.
You will likely need to take any missed RMDs. As a Roth, distributions should not be taxed, however, penalties may apply. The penalty is pretty stiff and applies for each year the RMD is missed, so missing a few RMDs can add up to a lot of money. There is a process for asking for forgiveness of the penalty. You should consult a tax advisor about whether to amend your 2022 return, how to handle these funds, and how to figure out the RMD problem.
If you have a question for Dan, please send him a letter with “MarketWatch Q&A” in the subject line.
Dan Moisand is a financial planner with Moisand Fitzgerald Tamayo, serving clients nationwide from offices in Orlando, Melbourne and Tampa, Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your advisor about what is best for you. Some reader questions are edited to help with topic presentation.
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