Withdrawals of contributions from an inherited Roth are 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. Please also note that the following options apply to people who are specifically named as beneficiaries on the deceased’s IRA account
.
If you are named as a beneficiary in an estate, you should consult your estate or financial planner. When an IRA owner dies, the assets in their account must usually be transferred to a new IRA on behalf of the beneficiary. Note that additional contributions cannot be made to an inherited IRA. The IRS doesn’t allow you to transfer the money from an inherited IRA to any of your existing accounts.
The
most common financial issues include enforcing the will and reviewing other aspects of their estate plan and inheritance. RMDs are intended to ensure that investments in IRAs are not deferred for tax purposes forever, and this is transferred to the IRA beneficiary. The IRS generally requires IRA owners who are not married to start paying the required minimum distributions (RMDs) no later than December 31 of the year after the original account holder dies. If you inherit a Roth IRA and are considered an eligible designated beneficiary (with the exception of a spouse),
you have multiple payout options.
If you’re a beneficiary of an inherited IRA, your first instinct may be to simply collect the funds within the IRA by making a lump sum distribution. Previously, if you inherited an IRA or 401 (k), you may have been able to extend your distributions and tax payments to your life expectancy. These rules don’t apply if you’ve simply transferred another IRA to your own IRA; they only apply to inherited IRAs. The date of death of the original IRA owner and the type of beneficiary determine which distribution method to use
.
A decision to reject IRA assets must be made within 9 months after the original IRA owner dies and before you take possession of the assets. If you’re a beneficiary and inherit an IRA, it’s important that you get a full picture of your options and the potential outcomes of each option available to you and the inherited IRA. If you decline to accept all or any portion of the IRA assets to which you are entitled, they will be passed on to the other eligible beneficiaries. You can treat the IRA as if it were your own retirement account by naming yourself as the owner of the IRA
.
It’s also important to note that although the original owner of a Roth IRA doesn’t have to take RMDs over their lifetime, beneficiaries who inherit a Roth IRA must purchase an RMD to avoid penalties. Unlike spousal beneficiaries, non-spouses must set up an inherited IRA because the IRS does not allow you to transfer the deceased IRA’s money to your own retirement account or deposit funds to
the deceased’s IRA.
