How Do I Report an Inherited Roth IRA Distribution?
If you inherit an IRA, the tax rules can be complex and confusing. A knowledgeable financial advisor can assist in understanding all of your options.
Eligible beneficiaries must begin taking required minimum distributions (RMDs) from an inherited Roth IRA by December of the tenth year after death, using either the IRS single life expectancy table or their own discretion to “stretch out” their RMD.
How to Report an Inherited Roth IRA Distribution
As their name implies, inherited Roth IRAs are accounts that beneficiaries receive after the death of the account owner. Their tax rules are the same as other IRAs.
Spouses who inherit Roth IRAs may choose to treat it as their own account, enabling them to withdraw contributions tax-free and recover any five-year-old conversions made before the original account holder died. They do not need to take required minimum distributions from this new Roth account either.
Non-spouse beneficiaries must clear out an inherited Roth IRA within 10 years of its owner’s death, with some exceptions being granted for minor children, chronically ill individuals and those not more than 10 years younger than its original holder. When withdrawing money from an inherited Roth IRA it is wise to consult a tax adviser first as these accounts can often be complex with various rules evolving over time; having professional guidance will ensure compliance while helping avoid costly errors in withdrawal procedures.
Taxes on Inherited Roth IRA Distributions
Roth IRA assets must be inherited according to several complex tax rules, and its beneficiaries must understand them to maximize the value of their inheritances.
Spouses and certain other eligible beneficiaries may “stretch out” distributions from an inherited IRA over their lifetimes; however, the SECURE Act generally limits this option for most non-spouse beneficiaries who inherit an IRA from a deceased spouse.
Other eligible designated beneficiaries, such as minor children who are considered heirs under the law, typically must empty an inherited IRA within 10 years of its original account owner’s death. Spouses on the other hand are allowed to roll an inherited IRA into their own IRA account and treat it like any other. They may rename it if desired but must work with their financial institution so it remains legally named “Name of Deceased Owner for Benefit of [Beneficiary’s Name]. Inheriting a Roth IRA this way avoids ordinary income taxes and penalties that otherwise apply;
Required Minimum Distributions (RMDs) on Inherited Roth IRA Distributions
Whoever inherits an IRA — whether Roth or traditional — faces several decisions regarding its funds, with 2019’s SECURE Act adding further complications to these considerations.
Spouses of an account holder can opt to roll over assets into an IRA in their name to bypass RMDs; nonspouse beneficiaries must begin taking withdrawals in accordance with their life expectancies starting Dec 31 of the year following an account holder’s death.
Some beneficiaries, such as minor children, chronically ill or disabled individuals or those at least 10 years younger than the original account holder can adjust their withdrawals by dividing their annual RMD amount by the life expectancy table published by the IRS. Other beneficiaries must adhere to the 10-year rule. It’s crucial for beneficiaries to keep track of these details so they do not incur penalties in the future.
Inherited Roth IRA Distributions for Non-Spouse Beneficiaries
Typically, the rules governing an inherited Roth IRA account are similar to those applying to traditional IRAs; however, non-spouse beneficiaries may need to keep several additional factors in mind when inheriting one.
Beneficiaries have the option to distribute assets held in an account over their lifetime, providing an avenue to reduce income tax by withdrawing only small amounts each year from their account. This strategy provides beneficiaries with an excellent way to protect assets against income tax liabilities by withdrawing only smaller sums annually.
Beneficiaries who meet all of the requirements can choose to treat an IRA as their own and skip RMDs entirely, giving their account more time to grow.
Before making major decisions regarding an inherited Roth IRA, it may be beneficial to consult with a financial advisor. An experienced adviser can ensure the beneficiary complies with all relevant rules and maximizes its growth potential; additionally, estate planning advice from this source could prevent unintended outcomes from emerging.