My ex-husband died in 2017. We had been divorced for over 40 years. I was still listed as the beneficiary. The Roth was started a very long time ago. My accountant told me that I would have to withdraw RMD because I reached the age of 72 in 2022. I received a form 1099R showing a distribution of $4,310 and Federal income tax withheld $862. Why did I have to pay tax?
Yes, $862 is exactly 20% of $4,310, and 20% is a common default withholding percentage found in distribution request forms. In fact, it is the mandatory default percentage for distributions from some retirement accounts. You should be able to specify the rate for any future distributions. In many cases, the withholding can be set to zero.
If the funds came from a Roth IRA, they are likely not taxable because I assume “…a very long time ago” means more than five tax years prior to his death. If that’s the case, you should get the $862 back either by reducing the check you write when you file your 2022 return or if you are due a refund, by increasing the refund. If you have already filed, you can file an amended return to get the it back.
You would have inherited this account under the rules in place in 2017. Because you were not married when he died, you were a nonspouse beneficiary. Roth accounts inherited by nonspouses from taxpayers who died prior to 2020 are subject to Required Minimum Distributions (RMD) every year regardless of the age of the beneficiary. Therefore, you should have been taking RMD based on your life expectancy starting in 2018 and continuing for as long as you have a balance. The 10-year rule recently put in place does not come into play.
If he had died in 2020 or later, the new 10-year rule would apply. Under that rule, no annual RMD are due on Inherited Roth IRAs, but the account must be completely empty by the end of the 10th year after the year of death.
You were not his spouse, but I will mention that spouses have options no one else gets when inheriting retirement accounts, IRAs, and Roth IRAs. For instance, only surviving spouses can take the funds into their own retirement, IRA, or Roth IRA account rather than as an inherited retirement account, inherited IRA or inherited Roth IRA. In other words, if you are married and you name your husband as beneficiary of your IRA, he could transfer the funds into his personal IRA when you die. From that point, the funds are treated as though they were always his. Though not universally the best choice, this is the most common.
You will likely need to take all the missed RMD. As a Roth, the distributions should not be taxable, however, penalties can apply. The penalty is pretty stiff and applies for each year an RMD is missed so having missed several RMD, this could add up to a substantial sum. There is a process to ask for forgiveness of the penalty. You should consult with a tax adviser about whether to amend your 2022 return, how to handle these funds going forward, and how to clear up the RMD issue.
If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line.
Dan Moisand is a financial planner at 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 adviser about what is best for you. Some reader questions are edited to aid the presentation of the subject matter.