You can leave the entire Roth IRA to your heirs. This makes a Roth IRA a particularly good instrument for transferring wealth. All money deposited into the account and income can be transferred to your beneficiaries. The best way to pass on a Roth IRA to your heirs is to name them in the account as the beneficiary. This ensures that the portfolio never becomes part of your estate and therefore does not entail inheritance tax problems, as this prevents an
This gives most heirs at least 10 years to withdraw the money from the account. In general, the Roth IRA allows you to pass on assets to heirs tax-free, meaning they won’t be taxed on the principal amount later on. If you inherit a traditional, rollover, SEP, or SIMPLE IRA from a spouse, you have several options, depending on whether your spouse died before or after the start date required to claim the required minimum distributions (RMDs). In a conduit trust, the natural or legal person named as the trustee beneficiary is treated as a direct beneficiary
of the Roth IRA.
No matter who you are, a Roth IRA is an excellent way to avoid capital gains and income taxes. Children who inherit a parent’s Roth IRA must withdraw all of the money from the account at some point. In addition to surviving spouses, this includes disabled or chronically ill people, people who are not more than 10 years younger than the IRA owner, or a child of the IRA owner who has not yet reached the age of majority. 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
It is important that the income tax treatment of the IRA remains the same from the original account to the inherited IRA. 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. Roth contributions are paid with money after tax, and any distributions you make are tax-free as long as you’re at least 59½ years old and have had a Roth IRA account for at least five years. 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
Of course, there are other ways to treat the Roth IRA that have different effects, and you should find out which is best for your situation. For example, if a spouse inherits a Roth IRA and chooses to treat it as their own, any withdrawn income in the account is taxable until the spouse is 59 ½ years old and the five-year holding period has been met. One of the most beneficial aspects of a Roth IRA is that it does not require minimum distributions (RMDs) during your lifetime. An inherited IRA can be a godsend, especially if you’re able to take advantage of decades of overall tax-deferred growth
One of the less obvious benefits of the Roth IRA is that it removes some tax issues when it comes to estate planning.