What Happens When You Inherite a Roth IRA?
Beneficiaries usually must empty their Roth accounts within 10 years and pay no taxes upon withdrawal unlike traditional IRAs, unlike with tax-deferred IRAs which must pay upon withdraw.
Beneficiary rules vary depending on whether the original account owner was either spouse or nonspouse beneficiary, so before making any moves it’s advisable to consult a retirement specialist first.
Taxes
Although inheriting an IRA may feel like a great boon, it also comes with tax obligations. Any assets received as inheritance will become taxable upon withdrawal and beneficiaries should familiarize themselves with all relevant rules before making decisions relating to withdrawal of their inheritance assets.
Beneficiaries have the option to treat an IRA as their own by either transferring it directly into their name, or retitling and opening a new inherited IRA in their name. By taking this route, they will be able to take distributions based on their life expectancy or stretch them over multiple years as desired.
But taking their RMDs all at once may put them into higher tax brackets and sacrifice future potential tax-deferred growth. Beneficiaries who wish to preserve future potential growth could keep the portfolio intact and diversify it to fit their financial goals and risk tolerance; an inherited IRA may be invested in various asset classes like stocks and bonds as well as mutual funds and ETFs – those willing to wait may consider more aggressive growth-oriented investments to maximize potential returns.
Withdrawals
An inherited Roth can offer years of tax-advantaged growth, but must be distributed within specific time frames. The specific rules will depend on who inherits it as beneficiary as well as whether the deceased IRA owner was over 70 1/2. A financial advisor can assist a beneficiary understand and navigate these regulations.
For most nonspouse beneficiaries of an inherited Roth account, the 10-year rule dictates they empty it within 10 years after receiving it after the death of the original account holder. However, in certain circumstances (“eligible designated beneficiaries” such as minor children under age 21, people with chronic or permanent disabilities and some relatives such as siblings or friends can extend withdrawals over their lifetime.
An inherited IRA can be complex and making the wrong decisions can have serious repercussions, which is why Bankrate recommends seeking guidance from a financial advisor if you are uncertain about yours.
Rollovers
An IRA beneficiary may choose to rollover an inheritance into his or her own account in their name, providing more investment flexibility and distribution freedom, but with potentially severe tax repercussions.
Beneficiaries who make direct rollovers will avoid incurring an early withdrawal penalty of 10% and may reclaim withholding taxes if done within 60 days of receiving their distributions.
Inherited Roth IRAs come with their own set of regulations, and beneficiaries who inherit one typically need to withdraw the funds over 10 years; however, this timeline can be stretched over their lifetime instead.
Bankrate’s AdvisorMatch can connect IRA beneficiaries with experienced wealth advisors who specialize in inherited IRAs. You can narrow your search based on expertise, location and other criteria before setting up a free initial consultation meeting with one who seems like the ideal fit for them.
Beneficiaries
Inheriting an IRA presents complicated issues for beneficiaries. To navigate through this maze of questions effectively and understand exactly what assets may come your way, speak to a TIAA wealth advisor about exactly what may be left over for you to manage and how best to care for them.
Surviving spouses have the option of treating any accounts that were left to them as their own by rolling or transferring them into an IRA under their name, which enables them to manage the accounts as desired, including continuing tax-deferred growth on any money held within an IRA.
Nonspouse beneficiaries have different choices depending on their relationship to the original account owner and whether or not the deceased was near retirement age when they passed. Typically, nonspouse beneficiaries should empty an inherited Roth IRA within 10 years after it has been passed on; with exceptions being minor children, disabled individuals or those not more than 10 years younger than the original account holder.
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