When you inherit a retirement plan from a deceased spouse or relative, depending on the type of plan and how the deceased made contributions, you may have to pay income tax on the plan’s distributions.
A Form 1099-R will usually report a “Q” or a “T” in box 7 for an inherited Roth IRA account.
“Q” means that the holding period of five years for qualified distributions has been met, so the amount is not taxable as it is a qualified distribution.
“T” informs the IRS that the holding period was not met, but the distribution is exempt from the penalty for early withdrawal because it has been paid to a beneficiary. The initial withdrawn contributions are tax-free; however, distributed earnings are taxable….(read more)
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