How Long Do You Have to Distribute an Inherited Roth IRA?
As of 2019, the rules surrounding Roth IRA inheritances changed dramatically. While beneficiaries could previously “stretch out” withdrawals over their lifetimes, now they must empty out the account within 10 years and this rule applies to eligible designated beneficiaries such as minor children up to age 21; chronically ill or disabled people; as well as spouses of deceased beneficiaries.
Five-year rule
As soon as you inherit an IRA from an IRA owner, the five-year rule must be observed when taking ownership. Otherwise, any withdrawals before age 59 1/2 will incur a 10% early withdrawal penalty and investment earnings will be taxed at ordinary income rates instead of preferential capital gains tax rates.
As a non-spouse beneficiary, you have two options when withdrawing funds: withdraw in one lump sum or transfer it into an inherited IRA in your name that follows the original account owner’s rules for distributions; or take required minimum distributions (RMDs) by Dec 31 of the year following their death; this option gives more time for enjoyment of inherited IRA funds compared with using them improperly for other purposes – though keep in mind the IRS has implemented the five year rule which prevents abuse of Roth IRA accounts being misused in such cases!
10-year rule
If you inherit a Roth IRA and meet certain qualifications, you can avoid the 10-year rule by treating it like your own account and withdrawing distributions whenever desired without paying tax or incurring penalties. However, any earnings in excess of 10 years must be subject to taxation; eligible beneficiaries include spouses, minor children, trusts for disabled or chronically ill individuals, etc.
If you are not the surviving spouse, RMDs should be taken based on your life expectancy until your account has been depleted. To avoid penalties if under age 59 1/2, lifetime withdrawals may be best; or consult with a financial professional or tax expert on what strategy works for them as the rules vary based on when their original owner died and what plan you have in mind with his or her money.
Life expectancy rule
If the beneficiary of an account owner is not his or her spouse, they must begin taking RMDs based on their own life expectancy no later than December 31 of the year following the account owner’s death. If multiple beneficiaries are involved, each must establish an individual account by this deadline in order to start taking distributions based on their individual life expectancies starting on that same date.
Beneficiaries who fit within certain exception categories – such as being a surviving spouse, disabled or chronically ill individual or under 10 years younger than the original account owner – do not need to adhere to the 10-year rule when taking RMDs based on their life expectancies until all assets in the account have been distributed fully.
Once a beneficiary reaches age 21, they no longer qualify for using the life expectancy method to liquidate their inherited Roth IRA; at that point, they must follow the 10-year rule and liquidate their account by the end of its tenth year post-death.
Designated beneficiary rule
Upon inheriting a Roth IRA from a loved one who has passed on, it’s crucial that the beneficiary designations be reviewed. While this can be sensitive subject matter, understanding how your inheritance will be distributed will help ensure compliance with rules and maximize tax-free growth. Spouses and beneficiaries in certain categories are exempt from the 10-year rule but it’s best to consult a tax planning expert so your RMDs are accurately calculated.
In 2022, the IRS proposed changes that would require beneficiaries of inherited retirement accounts to begin distributions and deplete their accounts within 10 years after their original owner died. Unfortunately, these proposed changes were delayed until 2024 and penalties for missed distributions have been waived by them. Eligible designated beneficiaries can assume ownership of an existing IRA which allows them to spread RMDs over their lifetime to reduce overall tax payments; all others must adhere to a 10-year rule.
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