Rules Vary for Spouse and Non-Spousal Heirs
Fact checked by Kirsten Rohrs SchmittReviewed by Ebony HowardFact checked by Kirsten Rohrs SchmittReviewed by Ebony Howard
As a beneficiary of a Roth IRA, your relationship to the original owner and the age of the account determine which options you have to manage the funds being transferred to you.
The rules regarding inheriting Roth IRAs and other retirement accounts have changed since the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019, particularly those for non-spousal heirs.
Key Takeaways
- Roth IRA account holders should name a beneficiary so that the money they saved to the person they select.
- If you inherit a Roth IRA as a spouse, you can treat the account as your own.
- Most non-spousal beneficiaries must make distributions and deplete the account within 10 years.
Estate Planning with Roth IRAs
Roth IRAs are valuable estate-planning tools for account holders. As an owner, all distributions that you take in retirement are tax-free. Additionally, you can keep your money in a Roth IRA to grow and pass it on to your heirs. Unlike a traditional IRA, a Roth IRA doesn’t have a provision for required minimum distributions (RMDs) at age 73.
An inherited Roth IRA once provided benefits for a lifetime to beneficiaries. Under the rules of the SECURE Act and SECURE Act 2.0, only spouses, minor children of the deceased, those who are disabled or chronically ill, and those who aren’t more than 10 years younger than the deceased, such as a sibling, can hold inherited funds in a Roth IRA account longer than 10 years.
Non-qualifying heirs who inherit a Roth IRA must distribute all the assets in the account within 10 years of the original owner’s death.
Why Designate a Roth IRA Beneficiary?
Roth IRA account holders should complete a beneficiary designation so that the remaining assets will be passed automatically to the beneficiaries they select. Often, the beneficiary is a surviving spouse or children, but it could be another family member or friend.
When you open a Roth IRA, you fill out a form to name your beneficiary, the person or persons who will inherit your funds after you die. Completing this form ensures the account and its tax benefits go to the person you intended.
Warning
Be sure you name a beneficiary and keep it updated after events like marriage, divorce, death, or the birth of a child.
Inheriting a Roth IRA as a Spouse
You have four options if you inherit a Roth IRA as a spouse:
Option 1: Spousal Transfer
With a spousal transfer, you treat the Roth IRA as your own. You’ll be subject to the same distribution rules as if it had originally been yours. To complete a spousal transfer, the assets will move into your named account or your existing Roth IRA.
- You can withdraw contributions at any time.
- Earnings are taxable until you reach age 59½, and it’s been at least five years since your spouse first contributed to the account, the 5-year rule.
- This option is only available if you’re the sole beneficiary.
- You can designate your beneficiary.
Option 2: Open an Inherited IRA, Life Expectancy Method
Assets are transferred into an inherited Roth IRA in your name. You’ll have to take the RMDs. But you have the option to postpone them until the latter of:
- The date when the original account holder would have turned age 73.
- Dec. 31 of the year following the year of death of the original account holder.
Distributions are spread over your life expectancy. However, if there are other beneficiaries, withdraws are based on the oldest beneficiary’s life expectancy unless separate accounts are established before Dec. 31 of the year following the original owner’s death.
- You can withdraw contributions at any time.
- Earnings are taxable unless the 5-year rule is met.
- You won’t be subject to the 10% early withdrawal penalty.
- Assets in the account can continue to grow tax-free.
- You can designate your beneficiary.
Option 3: Open an Inherited IRA, 5-Year Rule
Under the 5-Year Rule, the assets are transferred to an inherited Roth IRA in your name. You can spread out the distributions, but you must withdraw all the assets from the account by Dec. 31 of the fifth year following the year of the original account holder’s death, if you aren’t taking life expectancy payments. The 5-year rule applies to beneficiaries who aren’t designated beneficiaries if the owner died before their required beginning date (such as an estate or trust).
- You can withdraw contributions at any time.
- Earnings are taxable unless the 5-year rule is met.
- You won’t be subject to the 10% early withdrawal penalty.
- Assets in the account can continue to grow tax-free for up to five years.
- You can designate your beneficiary.
Option 4: Lump-Sum Distribution
If you choose this option, all the assets in the Roth IRA are distributed to you. Contributions to the account aren’t taxable, but the earnings are taxable if the Roth IRA was less than five years old when the original account owner died.
The original account holder’s Roth IRA custodian can help you understand your options, but they can’t give you advice or recommendations.
Inheriting a Roth IRA as a Non-Spouse
Non-spouses include adult children, grandchildren, other family members, and friends. You have three options if you inherit a Roth IRA as a non-spouse:
Option 1: Open an Inherited IRA, Life Expectancy Method
Assets are transferred into an inherited Roth IRA in your name. You’ll be subject to RMDs that must begin by Dec. 31 of the year following the year of the original account holder’s death.
Distributions were once spread over a non-spouse’s lifetime if the heir was the sole beneficiary. But with the passage of the SECURE Act of 2019, all funds must be distributed within 10 years of the original owner’s death.
When there are multiple beneficiaries, distributions are based on the oldest beneficiary’s life expectancy unless separate accounts are established before Dec. 31 of the year following the original account holder’s death.
- You can withdraw contributions at any time.
- Earnings are taxable unless the 5-year rule is met.
- You won’t be subject to the 10% early withdrawal penalty.
- Assets in the account can continue to grow tax-free.
- You can designate your beneficiary.
Option 2: Open an Inherited IRA, 5-Year Rule
Assets are transferred to an inherited Roth IRA in your name, and you can spread out your distributions over time, but you have to withdraw everything by Dec. 31 of the fifth year following the year of the original owner’s death.
- You can withdraw contributions at any time.
- Earnings are taxable unless the 5-year rule is met.
- You won’t be subject to the 10% early withdrawal penalty.
- Assets in the account can continue to grow tax-free for up to five years.
- You can designate your beneficiary.
Option 3: Lump-Sum Distribution
With a lump-sum distribution, the assets in the Roth IRA are distributed to you all at once. Contributions are tax-free, but earnings are taxable if the account was less than five years old when the original account owner died.
What Happens When the Owner of a Roth Individual Retirement Account (IRA) Dies?
Distributions must be made from your Roth individual retirement account (IRA) after you die. You can direct the distribution of the funds upon your death. You name the beneficiaries, and the funds will pass directly to your heirs without being subject to probate.
Do Heirs Pay Taxes on Roth IRAs?
Heirs, in most cases, can take tax-free withdrawals from a Roth IRA over 10 years. Spouses who inherit Roth IRAs can treat the accounts as their own.
Who Qualifies as a Designated Beneficiary of a Roth IRA?
An eligible designated beneficiary (EDB) includes a surviving spouse, a disabled or chronically ill individual, an individual who isn’t more than 10 years younger than the IRA owner, and a minor child of the IRA owner.
The Bottom Line
Roth IRA beneficiaries have several options, but tax consequences and distribution timelines vary. If you have a Roth IRA and don’t designate a beneficiary, the assets will be added to your estate and divided according to the laws in your state. Your heirs may lose tax benefits if you don’t name them in advance of your death.
If you inherit a Roth IRA as a spouse, you can treat the account as your own. However, most non-spousal beneficiaries must make distributions and deplete the account within 10 years.
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