How Long Do You Have to Take Out of an Inherited Roth IRA?
If you inherit an IRA, there are various distribution strategies you can follow for taking out distributions. Each has different rules depending on whether or not you qualify as the beneficiary and when the original account owner died.
Beneficiaries that qualify as spouses or eligible designated beneficiaries (like a child) can extend withdrawals throughout their lives; however, under legislation passed in 2019, non-spouse beneficiaries must empty out their Roth IRA within 10 years or else face legal consequences.
The 10-year rule
Before the SECURE Act was implemented, many beneficiaries of IRAs tried to delay receiving their distributions for as long as possible by taking small withdrawals each year and thus minimizing their tax bill. This strategy was often utilized by nonspouse beneficiaries – particularly young children or those suffering chronic illnesses – as it helped minimize tax costs.
The SECURE Act abolished stretch IRAs for most nonspouse beneficiaries and now requires them to liquidate inherited accounts within 10 years or face a 50% penalty.
To determine when this 10-year clock starts ticking, a beneficiary should know whether the original account owner met their required beginning date (RBD). If they did so prior to death, RMDs must begin in the calendar year following their demise; otherwise, the 10-year rule begins upon death and must be implemented using annual schedule based upon life expectancies of beneficiaries themselves; using this approach can result in substantial savings for them.
The five-year rule
The five-year rule is one option for inheritors to access an inherited IRA, and requires annual distributions known as required minimum distributions (RMDs) be made within five years after an account owner dies. According to Slott, however, this is an unwise strategy as it forces them to withdraw large sums that may place them into higher tax brackets.
The rule disallows the “stretch IRA” strategy, which allowed nonspouse beneficiaries to leverage their life expectancies to minimize withdrawals over time from an IRA account. This option remains open to spouses and chronically ill or disabled nonspouse beneficiaries, but due to the SECURE Act it has been made unavailable for many other nonspouse beneficiaries. Under this rule, contributions should be distributed first before converted amounts and earnings – this ensures that income taxes don’t become an issue until after five years have passed. Once the beneficiary reaches age 75 or later, RMDs must begin being taken from her own single life expectancy or from that of the deceased owner’s remaining single life expectancy (which decreases by one each year that assets remain in the IRA). NerdWallet writers are subject matter experts with extensive research capabilities who assess information for accuracy, timeliness and relevance.
The life expectancy rule
If you are an eligible designated beneficiary or nonspouse beneficiary of an IRA who dies prior to reaching their RBD (April 1 of the year following when their original account owner reached RMD age), distributions can be taken over your life expectancy – calculated as one less year than when they died (calculation used is age in year of original owner’s death minus one).
Under the 2019 SECURE Act, this option has been eliminated for most nonspouse beneficiaries inheriting an IRA; these individuals must now deplete it by Dec. 31 of the year following 10 years from account owner’s death, creating potential income tax consequences if it is large. Consulting an expert financial advisor is key in optimizing retirement plan strategies while mitigating taxes; find one in your area now for free consultation services!
The stretch rule
Before 2020, many nonspouse beneficiaries could take advantage of a stretch IRA strategy to reduce taxes by spreading withdrawals across their life expectancy. Under the SECURE Act however, this option was no longer available to most of these people (spouses can still utilize it). Instead, under its 10-year rule most beneficiaries must withdraw all inheritance within 10 years starting in year one.
Slott states that this rule typically applies to inherited IRAs and 401(k) accounts that were designated by their original account owner as being designated as such, including Roth IRAs passed on by spouses, estates and trusts as beneficiaries. Failure to meet this new 10-year rule usually incurs stiff tax penalties; for this reason many people choose separate beneficiary accounts whenever practical (though sometimes this may not always be practical).
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