is distribution from inherited Roth IRA taxable?

Sorry: over-editing made the grammatical antecedent unclear.

I mean: even if the __distribution__ occurs within that period.

Distributions are tax-free as five years have elapsed from when the Roth was created (2007 thru 2011). There is no early withdrawal penalty for a beneficiary. When a Roth IRA owner dies, the minimum distribution rules applicable to an IRA must be used by the beneficiaries. Your son died in

Thanks for the confirmation.

But in that case, please give me a concrete example when the second condition applies in the following rule in IRS Pub 590.

"If a distribution to a __beneficiary__ is __not__ a qualified distribution, it is generally __includible__ in the beneficiary's gross income in the same manner as it would have been included in the owner's income had it been distributed to the IRA owner when he or she was alive.

If the owner of a Roth IRA dies before the end of:

• The 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for the owner's benefit, __or__

• The 5-year period starting with the year of a conversion contribution from a traditional IRA or a rollover from a qualified retirement plan to a Roth IRA,

each type of contribution is divided among multiple beneficiaries according to the pro-rata share of each. See Ordering Rules for Distributions, earlier in this chapter".

How could the distribution be __non-qualified__ and the second condition apply (before 5 years after a conversion or rollover contribution), but __not__ the first condition (i.e. more than 5 years after the first contribution)?

It would seem that such a distribution to a beneficiary would be a qualified distribution, as defined in IRS Pub 590:

"A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

1. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and

1. The payment or distribution is: [....] c. Made to a beneficiary or to your estate after your death".

Well... I don't rely on pubs because the wording can some times be confusing. E.g., the pub gives you a definition for a qualified distribution by establishing the five year window starting in the year "for which a contribution was made to a Roth IRA set up for your benefit". That is not the wording in the law. The law says the five year window starts in the year you established and first funded the ROTH. You may have started your Roth by converting an IRA and never made any annual contributions.

I think the pub is trying to tell you that if the Roth IRA owner dies, then if the Roth was first funded by making an annual contribution, then that contribution sets the first year of the five year period. If the Roth was first funded by an IRA conversion, then that conversion sets the first year of the five year period. If funds are distributed before the applicable five year period has elapsed, it is not a qualified distribution and there is a taxable component to the beneficiary the same as if he/she had been the owner. Your son created the Roth via an annual contribution and that set the five year period in case of death. That period has elapsed.

The second issue after you first determine whether a distribution is qualified or not qualified for tax purposes (all this assumes that the Roth had earnings) is whether there is any early withdrawal penalty. We have answered that one as death trumps the early withdrawal rules.

Lastly, Congress added the rules for establishing a separate five year window on each IRA conversion in order to prevent a taxpayer from circumventing the early withdrawal penalty. E.g., a 45 year old taxpayer can take a distribution from an IRA and pay the tax and pay the 10% penalty. Without the five year rule, that t/p could convert the amount to a ROTH IRA, pay the tax on the conversion, then withdraw the funds from the ROTH and avoid the 10% early penalty on the distribution because the Roth rules allow you to withdraw principal first and there is no taxable distribution to apply the 10% penalty to.

Thank you for confirming the "confusion", if not contradiction, in IRS Pub

"Alan" wrote:

Actually, it is. 26 USC 408A(d)(2)(B) says: "for which the individual made a contribution to a Roth IRA (or such individual's spouse made a contribution to a Roth IRA) for such individual".

But that is not the part of IRS Pub 590 that I questioned. It is the self-contradicting statement that if a distribution is non-qualifying, part of it is includible in gross income if the distribution is within 5 years of the first contribution __or__ within 5 years of "a" conversion or rollover contribution.

Interestingly, that is indeed effectively what 26 USC 408A(d)(2)(B) said until it was amended in Pub Law 105-206 sec 6005(b)(3)(A) by the 1997-98 Congress.

But the pre-amendment language was not a contraction because 26 USC

"Alan" wrote:

Very good. That is effectively what 26 CFR 1.408A-6 says. Answer A-2 states: The 5-taxable-year period "begins on the first day of the individual's taxable year for which the first regular contribution is made to __any__ Roth IRA of the individual or, __if_earlier__, the first day of the individual's taxable year in which __the_first__ conversion contribution is made to __any__ Roth IRA of the individual".

Thanks again. I am now comfortable with relying on the date of the first contribution to my son's Roth IRA for the purpose of determining the taxability of (part of) any distribution by the beneficiaries. (None!)

Which is good. The Roth IRA custodian claims they cannot provide a history of subsequent contributions and their characterization because they do not have a record of that information. Frankly, I doubt that. But it's a moot point now. There is no need to pursue it further.