What Happens When You Inherit a Roth IRA?
Dependent upon your relationship to and the date of death of the individual in question, different options for managing their Roth may exist. Non-spouse beneficiaries must access and empty out their spouse’s Roth within 10 years from his or her death in order to comply with applicable tax regulations.
Prior to 2019, non-spouses could “stretch out” distributions over their lifetimes; but due to a new law, this option no longer exists.
1. Withdrawals are tax-free
At first, it’s important to keep in mind that your inheritance from a Roth IRA should be free from taxes as long as two conditions are met: account ownership has met the five-year test and you are at least 59 1/2. Any distributions after this time frame would incur taxes.
Filing IRS Form 8606 will enable you to track the basis and earnings associated with any inherited Roth IRA assets as well as contributions or conversions into Roth IRAs.
SmartAsset’s free tool matches you with pre-vetted advisors who service your area, so that you can interview your advisor match at no cost and decide whether they’re suitable. So get going now.
2. You can disclaim the inheritance
Think Advisor reports that beneficiaries may opt to disclaim an inheritance in order to avoid having to pay taxes on distributions from an IRA, however this must comply with certain criteria or face adverse repercussions; specifically they must execute a qualified disclaimer within nine months following the account owner’s death in order for this option to work effectively.
If an IRA is left to one or both spouses, the beneficiary has several options, such as rolling it into their own IRA and taking RMDs over time. Nonspouse beneficiaries have less flexibility and must take RMDs within life expectancy or face penalties if they do not do so.
Struthers stresses the importance of nonspouse beneficiaries understanding their options when inheriting an IRA, including consulting with a financial professional to find their optimal choice. Hedging against penalties down the line by choosing wisely is key.
3. You can roll it over into a traditional IRA
As the spouse of someone who inherits a traditional IRA, you have various options when dealing with it. One is to move the money into your own IRA account under your name; alternatively, leave it where it is and take distributions according to required minimum distribution regulations.
Non-spouse beneficiaries who inherit an IRA may move its funds into their own IRAs, though taxes will apply at ordinary income tax rates and they could incur an early withdrawal penalty of 10% if taking distributions before age 59 1/2. Known as eligible designated beneficiaries, such as minor children of deceased account owners, disabled or chronically ill individuals and anyone no more than 10 years younger than the original account holder can use their inheritance Roth IRAs with periodic distributions over their lifetime – known as a “stretch out” strategy.
4. You can roll it over into a Roth IRA
If you are not the spouse of the deceased IRA owner, your options for inheriting their Roth IRA are more limited. As there is no trustee-to-trustee transfer available like with traditional IRAs, instead it must be opened as a separate account and taken out over your life expectancy.
If the original IRA owner was no more than 10 years older than you, you can also postpone taking RMDs until after turning 50 – though be aware of a 10% early withdrawal penalty should you do this.
In general, any growth within an inherited Roth IRA that has been held for at least five years and converted directly or through non-direct rollover is tax-free upon death. Any subsequent growth may however be subject to taxes.
Categorised in: Blog