How Do I Cash Out an Inherited Roth IRA?
If you inherit an IRA, you have several choices for how best to utilize its potential growth. By choosing an appropriate option, it will allow for optimal investment growth.
Typically, non-spousal beneficiaries must liquidate an inherited Roth IRA within 10 years after its original account owner dies. There are however ways you may circumvent this rule.
Roll it into an existing IRA
One of the easiest options available when inheriting a Roth IRA is transferring it directly into an existing or new IRA account under your name – whether that means yours, a spouse’s, or anyone else’s. By keeping assets tax-deferred and avoiding withdrawal penalties altogether, tax deferral will remain intact; however, RMDs (required minimum distributions) will have to begin over your lifespan or that of deceased owner.
Prior to making any decisions regarding an inherited Roth IRA, it’s wise to consult a financial professional or estate planning expert. Given its complexities and complex tax rules, working with an expert is often best. Although the IRS offers guidelines and rules regarding inheritance IRAs, consulting an expert may prevent costly mistakes.
Take a lump-sum distribution
As with any investment, IRA rules can be complex. Consulting a financial advisor is best way to understand which options exist and which might work for your situation best. SmartAsset’s free tool connects users with pre-screened advisors who are equipped to answer their queries about investing.
Roth IRAs typically require beneficiaries of an inherited Roth account to begin taking required minimum distributions annually starting the year they reach 73 (or later if the account holder dies before then). But there may be options available that would allow large accounts to continue growing tax-free for decades.
Take a spousal distribution
Roth IRAs inheriting from deceased loved ones can present unique IRS rules, making beneficiaries aware of how to make smart choices that maximize growth and limit losses. A financial advisor can offer invaluable assistance.
One of the more frequent errors made when inheriting a Roth IRA is taking too quickly withdrawing funds, leading to an unexpected tax bill and possible penalties. Working with a financial advisor will help avoid penalties by helping you stagger withdrawals over time.
One way to reduce taxes by forgoing RMDs and taking a lump-sum distribution from an inherited account would be taking an annual distribution with minimum amounts. However, this approach requires taking out RMDs every year thereafter.
Under new retirement laws that went into effect in 2019, non-spouse beneficiaries must withdraw all assets within 10 years after the original owner dies, instead of being allowed to spread out withdrawals over their lifetime – giving you more time to invest and grow their account.
Take a tax-free distribution
Non-spouse beneficiaries have limited options when inheriting a Roth IRA; funds must either be moved into an inherited account or opened independently and all money must be withdrawn within 10 years from the time of original owner’s death.
Additionally, beneficiaries are required to start taking Required Minimum Distributions (RMDs), calculated based on their life expectancy. There are exceptions which allow beneficiaries to avoid tax or penalty assessments for RMDs: minor children as well as individuals who are disabled or chronically ill can benefit.
Before making decisions regarding an IRA, it’s always a good idea to consult a financial advisor. A good one can help you select the optimal option and maximize your inheritance, potentially saving costly mistakes down the line. An IRA is an invaluable asset and should be treated as such; taking expert advice could save years of unnecessary stress down the line.