How Do I Report an Inherited Roth IRA Distribution?
No matter your status – whether as the surviving spouse, eligible designated beneficiary or someone within 10 years of the deceased account owner – handling an inherited Roth IRA depends on your individual circumstances and advice from a tax professional is always recommended.
The IRS website provides detailed guidelines for taking distributions from an IRA.
RMDs
Non-spouse beneficiaries of an IRA should begin by meeting any required minimum distributions owed by their deceased account owner, which are calculated annually and spread out over their life expectancies or (in cases where an account holder was over 72) joint life expectancies with someone more than 10 years younger.
Calculating an RMD requires using one of the IRS life expectancy tables and dividing RMD-eligible account balance by the appropriate factor – which decreases with age, meaning beneficiaries must take larger annual distributions.
RMDs should always be treated as taxable income and should therefore fall within your tax bracket, potentially increasing Medicare premiums and Social Security benefits for beneficiaries. Therefore, it may be prudent to consult a specialist regarding inherited retirement accounts before taking an RMD distribution from them.
Spousal Transfers
Before making any decisions regarding an inherited Roth IRA, review its original owner and any relevant account paperwork. For instance, its title could indicate that your loved one designated you as their beneficiary instead of their estate. Spousal beneficiaries have more flexibility when it comes to treating their IRA like their own and stretching distributions over their lifetime, while non-spousal beneficiaries have different choices available to them. Under the SECURE Act’s new rules, non-spouse beneficiaries must typically liquidate an inherited IRA within 10 years after its owner dies; exceptions apply only in cases of disability, chronic illness or those less than ten years younger.
Spouses may roll their inherited Roth IRA into their own IRAs, while non-spouse beneficiaries cannot. If non-spouse beneficiaries wish to take non-taxable withdrawals they must follow the requirements minimum distributions (RMDs), which typically requires that contributions are distributed first before earnings.
Lifetime Withdrawals
After an IRA account owner dies, their beneficiary can transfer assets into either a Roth or traditional inherited IRA where RMDs will be calculated using IRS tables for his/her single life expectancy and withdrawals may be tax-free while gains remain taxable.
Nondesignated beneficiaries must take their required minimum distributions (RMDs) by December 31 of the year following an IRA owner’s death; this deadline can be reduced if it’s transferred within 10 years posthumously to an inherited account.
Slott advises beneficiaries not to transfer inherited funds into their IRA, since this can make it harder to calculate annual RMDs and potentially result in unnecessary taxes for them. Furthermore, it could reduce privacy issues and open them up to creditors; to make the best decisions regarding an inheritance it would be prudent to consult a fiduciary financial professional first.
Rollovers
If the deceased had an IRA that had been open for at least five years before they passed away, you can treat it like your own and withdraw funds tax-free. Use the life expectancy method when making distributions in future years; otherwise earnings are taxable. Non-spouse beneficiaries have different options: some can roll the IRA into their own retirement accounts while others must establish an inherited IRA with specific guidelines in place; those living with disabilities or chronic illnesses may even be exempt from RMDs and withdrawal penalties altogether.
Gagnon recommends against mixing together inherited and non-inherited money in your IRA, as doing so could make it more challenging to accurately calculate annual required minimum distributions (RMDs). While indirect rollovers may be easier, the IRS requires full contributions before taking distributions from it. Transferring an IRA takes more paperwork but may help avoid taxes on its proceeds.
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