Inherited Roth IRAs The payment of contributions from an inherited Roth is tax-free. Most withdrawals of income from an inherited Roth IRA account are also tax-free. However, profit withdrawals may be subject to income tax if the Roth account is less than 5 years old at the time the payout is made. Funds withdrawn from an inherited Roth IRA are generally tax-exempt when considered qualified distributions
.
That means the money has been in the account for at least five years, including when the original account holder was alive. If they don’t meet the qualified distribution criteria, money withdrawn from an inherited Roth IRA is taxed as normal income. An inherited IRA can be a godsend, especially if you’re able to take advantage of decades of overall tax-deferred growth. If you inherited an IRA from someone other than your spouse, there are different payout rules depending on the type of beneficiary you have (qualified designated beneficiary or designated beneficiary
).
Spouses who inherit an IRA have more flexibility than spouseless beneficiaries when it comes to when to start withdrawing withdrawals and emptying the account. In addition, a surviving spouse can delay the start of distributions until the end of the year in which the original IRA owner would have started taking RMDs, or until the start date prescribed by the surviving spouse. If the IRA owner dies before the year in which he turns 73, the distributions to the spousal beneficiary must not begin until the year in which the original owner turns 73. Until now, heirs have had the option to extend the payments from the IRA over their life expectancy. If you receive distributions from the Roth IRA before the five-year holding period is over, they are tax-free as long as they represent a repayment
of the owner’s contributions.
Spouses who inherit an IRA have more flexibility than spouseless beneficiaries when it comes to when they need to withdraw the money. If you inherit a Roth IRA and are considered an eligible designated beneficiary (with the exception of a spouse), you have multiple payout options. For large accounts, that can result in a monstrous income tax bill, unless the IRA is a Roth. In this case, taxes were paid before money went into the account. Accounts created with pre-tax dollars (like a traditional IRA) or after tax (like a Roth IRA) are therefore still treated the same way in an inherited IRA
.
If the IRA was a Roth and you’re the spouse, you can treat it as if it had been your own Roth all along. In this case, you won’t be exposed to RMDs during your lifetime. Now they can name their own beneficiary to succeed them, and they can handle the IRA as if it were their own, says Carol Tully, CPA, principal at Wolf %26 Co. If you inherit a traditional IRA that has had both deductible and non-deductible contributions, a portion of every distribution is taxable. Those who inherit an IRA and receive distributions from it are taxed on the income withdrawn at their normal rate, regardless of whether the estate was subject to inheritance tax
or not.
For example, someone who inherits an IRA does not pay a penalty for leaving early before the age of 59.5 years.
