Reporting an Inherited Roth IRA Distribution
When inheriting an IRA, certain distribution rules apply depending on your relationship to its original account holder and their year of death. You can learn more by viewing our Inherited IRA Brochure (SECURE Act compliant).
Beneficiaries who inherit Roth IRAs must take Required Minimum Distributions according to their life expectancy, or opt to “stretch” out their distributions by opening a separate beneficiary IRA.
Form 1099-R
Many rules are associated with inheriting Roth IRAs, making it imperative that you understand all of your options. Consulting a financial advisor may help ensure compliance with legal requirements and tax implications while taking full advantage of investment potential. Bankrate’s AdvisorMatch feature can connect you with advisors familiar with inherited IRAs.
Your options include taking ownership and rolling it over into another IRA, qualified retirement plan (such as 403(b) account) or retirement account of your own, like an IRA or 403(b). Required minimum distributions (RMDs), however, must still be taken – though you can stretch these withdrawals out over your lifetime if the original owner was aged less than 72 at time of distribution; spouses can ignore RMD requirements while continuing to enjoy tax-free benefits of the account while individuals without that status must withdraw the money over 10 years with penalties applying at 50 percent penalty rates if missed deadline.
Form 1040
IRS website contains rules on inheriting an IRA, or consult with your IRA custodian for guidance.
Get expert guidance when managing an inherited IRA through Bankrate’s free service AdvisorMatch, who can connect you with local financial advisors.
Nonspouse designated beneficiaries of Roth IRAs must take RMDs (required minimum distributions), calculated using tables provided by the IRS, over their life expectancies. Every year they must withdraw a percentage of the account balance using tables available from them.
Before 2020, many nonspouse beneficiaries could delay withdrawals by treating the accounts as their own. But changes introduced by the SECURE Act of 2019 and proposed IRS regulations in 2022 now require most nonspouse beneficiaries to empty their IRAs within 10 years – even if their original depositor died before 2020 – which is an important change for many people. Spouse beneficiaries still can take advantage of this option but only if the original account holder was also their spouse.
Form 8606
If you are the non-spouse designated beneficiary of an inherited Roth IRA and take distributions from it, filing Form 8606 annually is mandatory. This form reports the prorated after-tax and pretax amounts for any distribution received – this applies equally to traditional, SEP, and SIMPLE IRAs that contain after-tax contributions.
Prior to 2020, spouses could treat inherited IRA accounts as their own and avoid required minimum distributions (RMDs). Since then, however, RMDs must be taken or face a penalty. Non-spouse designated beneficiaries have more flexibility and can choose whether they take out distributions over their lifetime or take just the minimum annual amount required, giving them maximum tax-free advantage from Roth IRAs.
Reporting an Inherited Roth IRA
Distributions from an inherited Roth IRA may have different tax consequences depending on its type and age of its deceased account owner, so it’s advisable to consult a retirement specialist prior to withdrawing RMDs from an inherited IRA.
IRS regulations stipulate that after an account owner passes away, their beneficiary should open and withdraw funds within 10 years after opening a Roth IRA for them to begin withdrawals and contributions tax-free withdrawals are tax-free contributions and withdrawals are taxed as ordinary income rather than traditional IRA contributions and withdrawals which are taxed as ordinary income.
Non-spouse designated beneficiaries of Roth IRAs inherited from non-spouse donors can still extend withdrawals using an IRS single life expectancy table, according to Gagnon. But they shouldn’t commingle the money with their own IRA, since that can complicate calculations and negate tax deferral benefits, making inherited funds easier for creditors and more accessible than needed – which a beneficiary can avoid by opening their own separate inherited IRA account.
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