The contributions made to a Roth IRA are made with money that has been taxed, but the distributions made to both the original owner and the inherited owner are not taxed. The process of dealing with an inherited IRA depends on what type of beneficiary you are. As you’ll learn here, spouses and certain exempted beneficiaries have several options for how they receive distributions from inherited Roth IRAs. Let’s look at those options and how they work.
Definition and Example of an Inherited Roth IRA
An inherited Roth IRA is a type of retirement account left by an original owner to a beneficiary after the owner’s death. The beneficiary can be anyone, though the rules for how to handle the account differ based on the person’s relationship to the original owner.
Alternate name: RA Beneficiary Distribution Account (IRA BDA)
An inherited Roth IRA is similar to a standard Roth IRA in that the contributions are made with after-tax funds, but the withdrawals and distributions are untaxed, so long as certain requirements are met. For example, if you inherit a Roth IRA from your husband, and he opened the account more than five years ago, you can inherit his account and take distributions without an early withdrawal penalty (generally 10%) and without paying taxes on the distributions. If it has been more than five years from the date of the original owner’s first contribution to the Roth IRA, the beneficiary has more options for how to deal with the inherited funds without taxes and penalties. A beneficiary who was a spouse will have more options for how to handle the account than non-spousal beneficiaries. For example, then can take a lump-sum distribution or open a new IRA account in their name.
How an Inherited Roth IRA Works
Inherited Roth IRAs have different rules than a Roth IRA account that you own. These rules will vary depending on the type of beneficiary you are and when the account was inherited. First, all the money in the account must be distributed by a certain time, five or 10 years depending on the year the account owner died. If you inherited a Roth IRA from a deceased spouse and you are the sole beneficiary, you have the most options. You may roll the funds over into your own Roth IRA and continue growing a retirement account, which can be distributed tax-free after the age of 59½. Finally, spousal beneficiaries can elect the life-expectancy method. This method requires that monthly distributions are spread over the beneficiary’s life expectancy, but allows the funds can continue to grow tax-free. Roth IRA account owners are not usually required to take RMD, or required monthly distributions, like those of a traditional IRA. Beneficiaries of an inherited Roth IRA, however, must take RMD based on the traditional IRA’s rules.
Non-Spousal Beneficiaries
There are two types of beneficiaries other than the spouse:
Eligible designated beneficiaries, who are minor children, chronically ill, permanently disabled, or less than 10 years younger than the original account ownerDesignated beneficiaries who do not meet any exemption requirements
There are no requirements for how the funds are distributed within those 10 years. However, taking too much in one year may have a negative impact on your tax bracket. Eligible designated beneficiaries may also employ the life-expectancy method, but neither non-spousal group may grow the inherited Roth as their own as they could before the SECURE Act. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
