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. If you inherit a Roth IRA, your withdrawals are tax-free as long as they qualify as qualified distributions
.
As with anything else, be sure to talk to a tax or investment specialist about which options are best for you. Some experts advise IRA beneficiaries not to do anything until they’ve met with a financial advisor who can explain their options. Another hurdle for beneficiaries of traditional IRAs is finding out whether the benefactor took his RMD in the year of death. For example, if a spouse inherits a Roth IRA and chooses to treat it as their own, any withdrawn income in the account is taxable until the spouse is 59 ½ years old and the five-year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.
Ignore any renamed contribution that ends up in an IRA other than a Roth IRA to group (aggregate) both contributions and distributions. If you inherit a traditional IRA that has had both deductible and non-deductible contributions, a portion of each distribution is taxable. A Roth IRA doesn’t offer an upfront tax deduction like traditional IRAs, but withdrawals from a Roth IRA are tax-free in retirement. Federal income tax is withheld on distributions of traditional IRAs unless you choose not to withhold
taxes.
The original account holder of a Roth IRA is never required to accept RMDs, but those who inherit Roth IRAs do so unless they fall into one of the exemption categories. An IRA that operates in a calendar year must file Form 990-T by April 15 after the end of the calendar year. 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. Beneficiaries of a traditional IRA must include any taxable distributions they receive
in their gross income.
If you want, you can usually repay any portion of a qualified disaster distribution (or qualified disaster recovery distribution) that is eligible for tax-free continued treatment to a qualified retirement plan. With a traditional IRA, the decision as to who is eligible for these services is based on an IRA deposit balance (or a Keogh plan), which is the lowest qualified balance for all other account types. 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. And finally, if the first Roth IRA opened less than five years ago, there may not be a lot of income to worry about.
It is paid at the end of the 5-year period, which begins with the first tax year for which a contribution was made to a Roth IRA set up in your favor.