What Happens When You Inherit a Roth IRA?
If someone left you their Roth IRA as part of their will, it is important that you create a plan for how it should be disbursed. Under new rules passed by Congress last December, accounts must be cleared out within 10 years unless one of three exceptions apply: surviving spouse; chronically ill or disabled person; or beneficiaries that are no more than 10 years younger than when decedent passed away.
Earnings are tax-free
Understanding the implications of any inherited investment accounts is crucial. One advantage of Roth IRAs is their tax-free earnings withdrawals; however, this doesn’t address all tax concerns; in certain instances you may need to take required minimum distributions (RMDs) or face a penalty for unqualified withdrawals.
Inherited IRA rules can be complex and they change frequently. Recently, however, a law called the Secure Act was enacted that requires non-spouse beneficiaries of an inherited IRA to empty it within 10 years after its original owner has passed away, or be subject to certain exceptions.
Surviving spouses may circumvent this rule by retitling their late partner’s Roth into their own name or rolling it into an existing preexisting IRA that has met its five year holding period requirements. This tactic is frequently utilized among married couples who designate one another as primary beneficiaries for Roth accounts to maximize benefits under these regulations.
You can withdraw the money at any time
Roth IRA contributions can be withdrawn tax and penalty free at any time; however, any earnings from an inherited account are taxed like regular income – this can be particularly disadvantaging if your tax bracket is low.
Ideally, it is wise to hold onto any inherited funds as long as possible in order to reap their full benefits of compound interest. One effective strategy would be rolling the account into your own Roth IRA if possible (this option only available to spouses or beneficiaries).
As a designated beneficiary of an inherited Roth IRA, you have the option to treat it like it’s always been yours and avoid RMDs and the 10% penalty. But you must take distributions by December 31 of the year following account holder death or face penalties from the IRS; under SECURE Act rules have changed for non-spouse beneficiaries.
You don’t have to take required minimum distributions
When inheriting a Roth IRA from your spouse, treat the account like your own and do not need to take required minimum distributions (RMDs). This holds true even if the deceased was at or nearing RMD age of 72 at time of death.
But for non-spouse beneficiaries, the rules differ significantly. According to the SECURE Act, non-spouse beneficiaries must begin withdrawing at an estimated life expectancy or empty their entire account within 10 years unless meeting specific IRS exceptions such as being chronically ill, disabled, or younger than age 18.
Work closely with an experienced tax advisor to fully comprehend the implications of changes and make decisions that maximize the growth of your inheritance. Withdrawals from an inherited IRA account are tax-free; however, you must ensure compliance with rules or face penalties. There are various methods of administering such accounts; an experienced advisor can guide you through them all and find one best suited to your circumstances.
You can roll the account into your own Roth IRA
IRAs provide you with an opportunity to invest regularly, whether through payroll deductions, automatic bank withdrawals or direct deposits. And upon your death, any leftover money in your IRA could transfer over into the account of one or more beneficiaries.
Beneficiaries must abide by certain rules in order to remain compliant with IRS regulations. Under the new Secure Act rule, Roth IRAs inherited by beneficiaries must be empty within 10 years after an original owner passes away unless certain exceptions apply.
If you are the spouse of an individual who has died, their account can be treated as your own and withdrawals made over your lifetime without incurring an extra 10% penalty. Non-spouses must take RMDs each year starting at age 72 unless an exception applies; income tax must also be withheld on any withdrawals that exceed life expectancies; for this purpose a tax planning specialist can help identify solutions.