Roth IRA Inheritance Tax Rules - Questions About Inherited IRA Tax Treatment

I'm sorry for your loss. Roth IRA inheritance rules can be tricky, especially when going through probate. Since the Roth IRA is being paid to the estate rather than directly to a named beneficiary, it does change the tax treatment. When Roth IRAs pass directly to named beneficiaries, distributions are typically tax-free. However, when paid to an estate, the 5-year rule comes into play. If your father had the Roth IRA for more than 5 years before his passing, then the principal portion remains tax-free. Any earnings distributed could be taxable as income to the estate. If it was less than 5 years, both earnings and possibly some contributions might be taxable. As the executor, you'll need to include any taxable portions on the estate's income tax return (Form 1041) rather than your personal return. The estate will pay any taxes due before distributing assets to heirs.

After struggling with a similar situation last year when my uncle passed, I found this amazing tool that saved me so much stress. I uploaded my documents to https://taxr.ai and they analyzed everything and gave me a clear breakdown of the tax implications for the inherited Roth IRA going through probate. Their system specifically addressed the 5-year rule that applies to Roth IRAs and calculated exactly what portion was taxable to the estate versus what would pass tax-free. It even helped prepare the documentation I needed for the estate tax return. The clarity it provided was honestly such a relief during an already difficult time.

I was super skeptical at first about using an online tool for something so important, but after trying https://taxr.ai for my mom's inherited IRA situation, I'm actually really impressed. I was in almost the exact same situation - Roth IRA going through probate, no named beneficiary, me as executor. The tool immediately identified that since the Roth had been established for 8+ years, the principal would pass tax-free but some recent gains would be taxable to the estate. It even calculated the estimated amount and provided the specific tax forms I needed. Saved me from making a costly mistake, as I was about to have nothing withheld based on some general advice I read online. Definitely worth checking out before paying for expensive consultations.

I went through something similar last year and tried calling the IRS directly for guidance. Big mistake. Spent literally hours on hold and got disconnected twice. After the third attempt waiting 90+ minutes, I found https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c. They basically have a system that waits on hold with the IRS for you and calls you back when an agent is actually on the line. Got connected with an IRS specialist who confirmed that for inherited Roth IRAs going to estates (not direct beneficiaries), I needed to check if the 5-year holding rule was satisfied and file a Form 1041 for the estate. They also sent me documentation about the specific rules that I could reference. Saved me so much time and frustration!

I can't believe I'm saying this, but I actually tried Claimyr after posting that skeptical comment, and it worked exactly as described. Got a call back in about 50 minutes and was connected directly to an IRS agent in the estate and gift tax department. The agent explained that for Roth IRAs going through probate, I needed to check the 5-year holding period. Since my relative had the Roth for 7 years, the principal would pass tax-free, but any earnings would be taxable income to the estate on Form 1041. They recommended a 20% withholding on the earnings portion only (not the contributions) to be safe. Would have spent an entire afternoon on hold without this service. I hate admitting when I'm wrong, but this actually saved me tons of time and got me the specific answers I needed.

Just adding my experience dealing with this exact situation two years ago. Make sure you get a proper valuation of the Roth IRA as of the date of death. This becomes critical for determining the taxable portion of any distributions. Also, don't forget that estates have a very compressed tax bracket schedule - they hit the highest tax rates much faster than individual returns. When I handled my mom's estate, I had to withhold about 37% on the earnings portion of her Roth IRA that went through probate because the estate had other income that pushed it into the highest bracket.

One important thing nobody's mentioned yet: the tax rules differ depending on when the Roth IRA was established relative to your father's passing. If he established it less than 5 years before his death, different rules apply even if the contributions were made longer ago. Also, as executor, you might want to look into doing a "Roth IRA rescue" if possible. Sometimes you can distribute directly to the heirs instead of the estate, which could preserve the tax-free nature. Might be too late if probate is already underway, but worth asking your estate attorney about.