How Long Do You Have to Distribute an Inherited Roth IRA?
If a non-spouse beneficiary inherits an IRA, they’re required to empty it within 10 years and pay any applicable federal and/or state income taxes on withdrawals – which could potentially leave them with an unexpected tax bill.
Beneficiaries have two options for avoiding taxes on distributions: using either the life-expectancy method or 10-year rule. However, before taking any decisions themselves they should consult their accountant and/or attorney first.
Five-year rule
If you’re the surviving spouse, an inherited Roth IRA with life expectancy distribution method allows you to withdraw investment earnings without paying the 10% early withdrawal penalty. However, this requires taking Required Minimum Distributions by December 31 of the year following their deceased spouse’s death; nonspousal beneficiaries must take RMDs every 10 years.
As another option for withdrawing investment earnings from an inherited Roth IRA, the 10-year rule may also be considered. This method divides annual withdrawals over either your lifetime or that of the deceased account holder, depending on which is longer. It is wise to consult a fee-only financial planner in this process for optimal results.
The 10-year rule is an effective tool for calculating required minimum distribution (RMD) obligations, but there are exceptions. Beneficiaries who meet any of these categories may opt to use it: surviving spouse, disabled beneficiary or someone less than 10 years younger than decedent.
10-year rule
SECURE Act 2019 mandates non-spouse beneficiaries of an inherited Roth IRA to empty it within 10 years from death, effectively restricting one of the most popular estate planning strategies known as stretch IRA. Stretch IRA allows beneficiaries to withdraw their funds over their lifetime tax-free and build wealth over time.
Spousal beneficiaries, minor children and those suffering chronic or severe illness can continue using stretch IRAs until reaching age 72; however, RMDs must start being taken by December 31 of the year following the original account holder’s death.
To maximize investment returns and minimize taxes, it’s wise to seek advice from both a tax professional and financial advisor on how the new 10-year rule may impact your situation. Furthermore, consider keeping any inherited funds separate from other accounts so as to reduce potential confusion.
Lifetime distributions
Roth IRAs owned by an inheritance are similar to accounts you open yourself; however, there are a few differences. Earnings accrue tax-free if the original account holder opened it at least five years prior to his death and distributions can be taken on life expectancy basis; this option expires upon death and a successor beneficiary takes over control of the account.
Other considerations for an inherited IRA depend on its date and type of beneficiary, with eligible designated beneficiaries including surviving spouses who treat the account as their own without taking RMDs; minor children until age 21; chronically ill/disabled individuals and chronically ill/disabled people being eligible beneficiaries. Nondesignated beneficiaries such as trusts must empty the inherited account within 10 years after an IRA owner dies while nonspousal beneficiaries must fulfill certain conditions to avoid taxes on its earnings if an inherited Roth IRA owner dies within that time period.
Rollovers
When rolling over an inherited IRA, distributions must be taken according to either your single life expectancy (determined using the IRS Single Life Table based on your age in the year following the death of its original account owner) or that of the deceased account holder’s remaining life expectancy. RMD calculations begin upon multiplying end-of-year account balance by an age-based factor derived from calendar year following death of original owner; then each RMD for subsequent years can be found using this formula.
Spouse beneficiaries have two distribution options when inheriting Roth IRAs from deceased account holders: lifetime distribution or 10-year distribution rule. If choosing lifetime distribution, they must liquidate it by Dec 31 of the tenth year following death of account holder.
Consult a fee-only certified financial planner who has no conflicts of interest to help make informed decisions for your situation. They can review other available strategies as well as recommend ways to better your tax situation.
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