Inheriting a Roth IRA
Before making any major decisions about an inherited Roth IRA, consult with a financial advisor first. In general, eligible designated beneficiaries such as spouses or minor children (until age 21 when the 10-year rule kicks in), disabled beneficiaries or chronically ill people no more than 10 years younger than the original account holder can take distributions over their lifetimes.
Take a lump sum distribution
Dependent upon the date of death of the original account holder, beneficiaries have various options upon inheriting their IRAs. Spouses have the option to roll it over into their accounts directly while non-spouse beneficiaries must follow the 10-year distribution rule which requires them to withdraw all assets from an inherited IRA within 10 years. Beneficiaries should familiarize themselves with all investments within their inherited IRA as each type offers different risk and return profiles.
As soon as you inherit an IRA, it is crucial that you are aware of its rules and how they apply to you. Some beneficiaries can take distributions based on their life expectancy; others must use the 10-year rule. Whatever your circumstance, seeking guidance from an independent financial advisor is recommended in order to get maximum value from it.
Take a distribution based on your life expectancy
Alternatively, if you wish to withdraw funds quickly and avoid RMDs altogether, taking a lump-sum distribution can allow for quick withdrawal of your funds while paying income tax on it all immediately – though this may place you into a higher tax bracket during that year.
Option two involves taking distributions over your life expectancy; however, doing so would require paying tax each year on any withdrawals and forfeiting tax-deferred or tax-free growth potential in your IRA.
This option is open only to nonspouse beneficiaries who are no more than 10 years younger than the original account owner, or spouse beneficiaries or chronically ill or disabled beneficiaries who fall within this criteria. In cases in which account owners died before reaching RBD, their life expectancies are used as the basis of initial required distribution (RMD). Thereafter, annual RMD calculations are calculated using factors from IRS single life expectancy tables.
Take a distribution based on your income
IRAs are accounts that allow you to invest tax-deferred income and then withdraw its earnings without paying taxes, without incurring penalties or required minimum distributions (RMDs). There are both traditional and Roth IRAs. You can withdraw earnings in either type depending on whether it meets your needs; traditional accounts take distributions according to age or life expectancy while Roth accounts don’t. When treating an inherited IRA as your own you can transfer it or open one under your name – keeping both accounts active can avoid required minimum distributions (RMDs).
Before making any decisions regarding an inherited IRA conversion to Roth, it is advisable to seek advice from an impartial financial professional. Converting may result in significant tax liabilities; you could find yourself moving into higher tax brackets which will have an effect on future investments made and creating a new account subject to all investment and withdrawal rules that apply to your account(s).
Take a distribution based on your age
Assuaging any tax implications when inheriting a Roth IRA may come with unanticipated consequences that you might not fully realize. This is because the government outlines when you must make required minimum distributions (RMDs) from such assets inherited, depending on your relationship to and date of death of the individual whose estate you inherited it from. It’s vital that you are familiar with these regulations and consult a financial advisor prior to making any definitive decisions involving an inheritance account.
Under normal circumstances, heirs of deceased account holders must empty it within 10 years after death; however, due to the SECURE Act this timeframe has been reduced to five years for non-spouse beneficiaries who inherit an IRA in 2020 or later.
This change also impacts non-spouse beneficiaries who inherit traditional IRAs, who used the “stretch” strategy to stretch out RMDs over their lifetimes. Now, however, they must empty the account in five years or less according to IRS life expectancy tables. While inheriting an IRA can be complex, qualified financial advice can ensure you adhere to its rules correctly.
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