27 Nov Should I keep the stock in this inherited Roth IRA?

Q. To my great sadness, my mother passed away this year. She left a Roth IRA which became an inherited Roth IRA for her children. We know that we do not have to pay taxes on withdrawals, that we are past the 5-year mark for when my mother originally created the Roth, and that we have to deplete the Roth vehicle within 10 years of her date of passing. When the inherited Roth IRA was distributed to the children’s names, the original cost basis was transferred over. So, for example, a stock with a current market value of $100 has a cost basis of $50. When we transfer the stock from the inherited Roth IRA into a non-IRA brokerage account, shouldn’t the cost basis revert to the current market value when it is sold, i.e. $100?
— Beneficiary

A. We’re sorry to hear about your mom.

Let’s start with some background on how Roth IRAs work.

When a Roth is opened, “after tax” dollars are contributed into the account, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette.

He said this simply means there is no initial tax benefit or deduction for contributing to a Roth IRA.

“After the money is contributed, future growth is tax free,” he said. “Future distributions are also tax-free as long as they meet the rules.”

Another benefit of Roth IRAs is that the original account owner has no mandatory distributions unlike the traditional IRA, which has a required beginning date (RBD) for distributions based on one’s age, and required minimum distributions (RMD), he said.

However, with both inherited traditional IRAs and inherited Roth IRAs, they must be distributed based on when the IRA was inherited as the rules have changed over time, Maye said.

In your case, you and your siblings inherited your mom’s Roth IRA under the new rules.

“Assuming they established a Roth IRA in their own name, all funds must be distributed by Dec. 31 of the 10th year after their mother’s death,” he said. “The good news in the reader’s case is that since the distributions are coming from an inherited Roth IRA, they will be income tax-free.”

Maye said to take the distribution, you can either sell the underlying holdings in the Roth IRA and take cash or alternatively, take an in-kind distribution in the underlying securities — which it sounds like you want to do.

“If they go the route of taking an in-kind distribution to their brokerage account, the cost basis becomes the dollar value at the date of transfer into their own account,” Maye said.

Before you make that kind of a move, Maye said he recommends you consider whether the stock makes sense as a part of your overall portfolio and goals.

“Also, depending on the position size, would it result in a concentrated position to their overall
net worth?” he said. “Sometimes when stocks are inherited from a parent, there can be the assumption it’s automatically worth holding or there can be an emotional element.”

So before you decide to keep the holdings, make sure they match your goals and fit in with the rest of your portfolio.

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This story was originally published on Nov. 27, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.