How Long Do You Have to Distribute an Inherited Roth IRA?
Due to recent tax code amendments, the required minimum distribution (RMD) time frame for an inherited Roth IRA differs significantly from traditional IRAs. RMDs must begin one year following account owner death and be calculated based on life expectancies of beneficiaries.
Non-spouse heirs of an inherited Roth IRA have up to 10 years to deplete it tax free; however, large withdrawals may place beneficiaries into higher tax brackets.
Life expectancy method
The Life Expectancy Method of Dispersing an Inherited Roth IRA allows beneficiaries to keep their investments for an extended period, thus deferring RMDs until age 59 1/2 is reached or the five year holding period has passed. Spousal beneficiaries may use this approach, however non-spouse beneficiaries cannot utilize it.
Slott said the IRS Single Life Expectancy Table provides each beneficiary with a life expectancy factor to use when calculating their first RMD, then subtracted one when calculating subsequent payments. To avoid confusion among inherited and non-inherited assets, beneficiaries should avoid conjoining assets from both sources when making RMD calculations, Slott advised.
Under the SECURE Act, most nonspouse beneficiaries must clear out their inherited IRA within 10 years unless they meet an exception such as minor children, disabled individuals or those not younger than 10 years from the original account owner – effectively restricting “stretch IRA” tax planning tools available to many beneficiaries.
If you or your spouse are not eligible beneficiaries of a Roth IRA and inherit one, within 10 years from its date of death you must close and empty it within that time frame or pay a 10% penalty on taking distributions in lump sum form. However, taking distributions gradually may allow your investments to grow tax-free over time.
This 10-year period was introduced by the SECURE Act. Prior to this, heirs could “stretch out” withdrawals over decades; but now most nonspouse beneficiaries must empty their inherited accounts within 10 years after an original owner dies, except in certain special categories set forth by law or spouses of deceased owners. This change prevents beneficiaries from employing popular stretch strategies for IRAs as it could potentially put them into higher tax brackets; ultimately deciding upon an approach depends on your circumstances and is best discussed with an accredited financial planner.
Roth IRAs may be distributed via accumulation or conduit trusts, with each type having different tax implications; both require RMDs to be taken within 10 years after the death of the original owner. A younger surviving spouse in need of financial support can opt to treat the account as a beneficiary IRA which allows distributions over a single life expectancy or the 10-year rule; any undistributed assets remain tax-free until withdrawal occurs from the account.
Roth IRAs tend to be better investments for inheritance purposes because their distributions are tax-free for at least five years (applies to both spouses and non-spouse beneficiaries), as can distributions over their life expectancies and until age 21 or the year they become regular designated beneficiaries (whichever comes first), then must be depleted within 10 years from date of death.
If a beneficiary chooses to rollover an inherited Roth IRA distribution, this will be treated as a qualified transfer or rollover and avoid income tax withholding and the standard 10% additional tax on early distributions. Be wary, though; taking this route could increase income tax withholding as well as make funds more accessible to creditors and reduce privacy.
Roth IRAs left to beneficiaries through inheritance are usually distributed either directly through rollover or lump sum distribution, tax-free if the original account had been open at least five years. If, however, a Roth account owner dies before its required beginning date for RMDs is reached, their beneficiary must withdraw all funds by Dec 31 of that same year to comply with regulations regarding RMD withdrawals.
An individual beneficiary can use either the life expectancy method or 10-year rule to calculate RMDs from an inherited Roth IRA; nondesignated beneficiaries, such as trusts, must use the five-year rule instead.
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