How Do I Cash Out an Inherited Roth IRA?
The IRS provides comprehensive rules on how to withdraw funds from a Roth IRA after someone’s death, with differing regulations depending on your relationship to them and when their death occurred.
Spouses of deceased owners may treat an inherited Roth IRA as their own and avoid required minimum distributions (RMDs), while all other beneficiaries must empty it within 10 years after death of original owner.
Beneficiaries inheriting an IRA have several options available to them when inheriting one, with spouse beneficiaries being given priority when selecting their path (provided the death occurs after 2019). Spouse beneficiaries may treat the account like their own without taking RMDs while non-spouse beneficiaries must empty it within 10 years (increased to 20).
An inheritance IRA distribution can push you into a higher tax bracket, making it even more crucial that you choose a distribution strategy with caution. Consult a fiduciary financial professional and estate planning specialist before making any final decisions.
Traditional IRAs must comply with IRS rules which stipulate withdrawals over your lifetime from contributions, conversions and earnings but not capital gains. Roth accounts follow similar requirements; however, rules regarding inherited Roth accounts differ slightly and could provide long-term retirement assets in certain cases.
Many beneficiaries elect to convert IRA money into a Roth, which allows them to postpone withdrawals until their retirement age. Unfortunately, conversion requires required minimum distributions each year from years one through 10, potentially placing them into higher tax brackets. A financial professional can assist beneficiaries in evaluating whether converting to a Roth would have benefits against its possible withdrawal repercussions for both their tax situation and overall financial plan.
Inherited IRA assets may also be distributed over a beneficiary’s single life expectancy or that of their deceased account owner, using an IRS life-expectancy table. This approach may reduce RMDs but the account must be closed by December 31 of the year following death; an alternative option would be leaving it as-is and passing it along directly to another eligible beneficiary; but this must take place within nine months of original account holder’s passing, potentially jeopardizing privacy and making funds vulnerable to creditors.
Traditional IRAs contain withdrawal rules that trigger taxes; inherited Roth IRAs typically offer tax-free distributions; however, beneficiaries must open an inherited account in order to receive distributions and complete a 10-year payout period (opening before 2029 was possible through “stretch IRA” strategies). Prior to 2019, non-spouse beneficiaries such as children or grandchildren could use an “stretch IRA” strategy in order to take withdrawals over their lifetimes.
However, this rule was altered with the 2019 SECURE Act’s passage and now requires heirs of Roth IRAs inherited from deceased loved ones to empty them within 10 years or face significant income tax consequences. For individuals in higher tax brackets this could entail large income tax bills; whether it is best to try to maximize cash distributions or withdraw minimally over decades should be reviewed by a financial professional; in some instances both strategies may work better together. Spouses, minors, chronically ill or disabled individuals are exempt from this 10-year time limit; for others who don’t require immediate access.
Roth accounts have complex rules. Before making any moves with these accounts, seek advice from an estate planning expert and/or fiduciary financial professional.
If the deceased or someone you care for has died, and their IRA was opened at least five years ago (i.e. you met its holding period requirement), then you can assume ownership and move its assets directly into your own account using direct rollover. Withdrawals may then be tax-free provided the initial account had a minimum holding period.
However, direct rollover can expose you to further complexity, possibly including higher Medicare premiums and taxes on Social Security benefits. Furthermore, this option may not be ideal if you anticipate being in a lower tax bracket in retirement; sometimes leaving funds in their original account and stretching out RMD payments over 10 years may be preferable; this strategy is commonly chosen among younger beneficiaries.
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