How Long Do You Have to Distribute an Inherited Roth IRA?
Due to recent tax changes, beneficiaries of an IRA should exercise extreme caution when managing their inheritances. Seeking professional advice would be wise.
Beneficiaries have options depending on the type of IRA account. For instance, Roth account owners have the choice between leaving funds indefinitely or taking distributions over 10 years – though for other IRA types this timeline can be shorter.
RMDs
IRA distribution periods begin the year following an account owner’s death, with non-spousal beneficiaries required to begin taking required minimum distributions (RMDs) based on their expected life spans in that same year. If the deceased left multiple beneficiaries, RMDs from the oldest beneficiary take precedence.
RMD amounts must be collected annually and are typically included as taxable income. Beneficiaries have the option of either spreading out their RMD payments throughout the year or making one lump-sum tax-deductible payment.
Before 2020, non-spousal beneficiaries had the option to “stretch out” their inherited IRA distributions over their expected lifespan for maximum tax-advantaged growth. But thanks to the SECURE Act changes in 2017, non-spousal beneficiaries must now deplete their accounts within 10 years following an account owner’s death; those who choose this route can still take advantage of investment opportunities while avoiding an early withdrawal penalty of 10%.
Distributions
Beneficiaries can take distributions from an inherited Roth IRA using different strategies. A financial advisor can assist them in selecting one that is best tailored to their personal financial goals and tax bracket.
Before 2020, beneficiaries could utilize the “stretch IRA” strategy to reduce RMD withdrawals over their lifetimes. However, with the SECURE Act’s changes to this option for most nonspouse beneficiaries inheriting traditional IRAs after their required starting date (RBD), most could no longer use this method to reduce withdrawals at RBD.
Beneficiaries can choose between taking either a lump-sum distribution from their inherited IRA, or taking required minimum distributions (RMDs) each year from it. Those who plan on keeping their money within an inherited IRA for some time might prefer growth-oriented investments that will offer higher returns over time; those withdrawing their money soon might opt for safer investments like bonds or mutual funds for greater diversification in an effort to maximize its value.
Taxes
An inheritance of an IRA can be both rewarding and complex. Depending on who inherits it, their age and when the original account holder died, withdrawal rules and tax rates differ – Bankrate offers an IRA calculator to help determine what options may be available to them.
Inheriting an IRA can be an essential component of your retirement strategy, yet like all investments accounts it’s subject to taxes and fees that need to be met in order to be profitable for your finances. Therefore it is crucial that you understand their rules so as to make sound financial decisions for yourself.
those who qualify as eligible designated beneficiaries can “stretch” their distributions according to an IRS life expectancy table, such as minor children (depending on state law), the surviving spouse and those chronically ill or disabled. Nonspouse beneficiaries, including grandchildren or other relatives must abide by a 10-year rule in order to take required distributions on time; failing to do so could incur a severe income tax penalty.
Fees
Financial goals and risk tolerance of beneficiaries can have a direct effect on their ability to maximize their inheritance. Younger beneficiaries might opt for growth-oriented investments with potential for exponential returns over time; older ones might prefer more conservative assets like bonds or money market funds.
Beneficiaries should also familiarize themselves with all available investment options within an IRA, including stocks, mutual funds and ETFs (exchange-traded funds). Each provides unique returns and risk profiles.
Before 2019, Roth IRA withdrawals could be staggered over many years, allowing heirs to use this strategy as they saw fit. Under a new retirement law passed in 2020, nonspouse beneficiaries must now empty their inherited accounts within 10 years after the account owner has died; exceptions may include minor children until age 21, at which point it becomes applicable or disabled individuals or people no more than 10 years younger than the account holder themselves.
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