Understanding and dealing with an inherited Roth IRA requires additional steps than with regular IRAs. You may encounter paperwork requirements and must devise strategies to minimize tax impact for yourself and future beneficiaries.
Spouse beneficiaries can roll over assets into an IRA of their own and treat them as though they had always belonged to them, while non-spouse beneficiaries must withdraw them within 10 years after the account owner passes away.
Taxes
If you inherit either a traditional or Roth IRA, certain tax rules must be observed. This includes RMDs – required minimum distributions which require you to withdraw some assets within a certain timeframe following the original account owner’s death and sacrifice potential tax-deferred growth potential.
Spouse beneficiaries can treat an inherited account as their own and take withdrawals over their lifetime, while nonspouse beneficiaries must complete withdrawals by December 31 of the 10th year following death.
Alternative solutions exist to help manage tax liabilities, such as rolling assets over into an inherited IRA in your name or rolling them over into an existing IRA in your name. A financial advisor specializing in retirement may help determine which option would be the most beneficial in your circumstances.
Withdrawals
Assigning an IRA to you can be a financial boon, but can come with significant tax ramifications. A financial professional can assist in mitigating their impact.
Based on your relationship to the deceased and their IRA type, you may need to take annual withdrawals (known as Required Minimum Distributions or RMDs), or you could choose “stretching” distributions over your lifetime using IRS life expectancy tables. If you inherit a traditional IRA as non-spouse beneficiary then RMDs are taxed as ordinary income.
Roth IRA distributions are generally tax-free, though you must wait five years after the original account owner dies before you can access their funds. While you wait, however, pretax contributions can still be made and tax-free growth earned. Or alternatively you could roll over assets into an IRA in your name while maintaining access for retirement or other goals.
Rollovers
When inheriting an IRA, there are various options available to you. You could withdraw all or some of the funds at once, transfer them into an inherited Roth IRA (or traditional IRA), or treat it like your own and move it elsewhere – speaking with a financial advisor will help determine the most suitable solution for your circumstances.
Complex rules surrounding inherited retirement accounts can make it easy to make costly errors, so having access to financial advice from an advisor may help to minimize taxes while optimizing growth potential.
An asset transfer to non-spousal beneficiaries allows them to choose whether to place assets into an inherited IRA in their name and take out required minimum distributions (RMDs) annually based on life expectancy or roll over into their own IRA or qualified retirement plan (such as 403(b) plans), provided the original account owner did not take an RMD in their year of death; this allows tax-free growth on their investments.
Options
Roth IRA withdrawals do not qualify as tax-deductible like traditional retirement accounts do, which allows withdrawals to be taxed as income – in this instance if you’re under 59 1/2, there may even be an additional 10% penalty tax applied if they’re used before that age is reached. Non-spouse beneficiaries typically have two choices when inheriting Roth IRAs: (1) pay their income taxes at once to avoid incurring tax penalty and 2) roll over into an inherited 401k plan with another institution as soon as possible to avoid incurring taxation at some later date
One option available to those inheriting assets is rolling them over into an IRA held in their name, either via trustee-to-trustee transfer or direct rollover between custodians.
Allowing an account’s beneficiary to take distributions based on their life expectancy can also be an option, and is available to eligible designated beneficiaries such as minor children, disabled individuals or those not more than 10 years younger than the original account owner. It’s worth consulting a financial advisor in order to best understand inheritance rules and what suits your own situation – SmartAsset provides access to qualified advisors nearby who can answer your queries about inheritance.
