Inherited Roth IRA beneficiary rules
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Updated 11:49 a.m. UTC Nov. 7, 2023
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Key points
- A Roth IRA doesn’t have required minimum distributions unless it’s inherited.
- Withdrawal options vary depending on your relation to the deceased.
- Consult a tax professional before making decisions about an inherited Roth IRA.
Roth individual retirement accounts offer unique tax advantages, including a lack of required minimum distributions in retirement — a mandatory provision for traditional IRAs, 401(k)s and other employer-sponsored retirement plans.
But if you inherit a Roth IRA from a loved one, you generally must empty the account within 10 years of the original account owner’s death, with some exceptions. Withdrawal options and tax ramifications vary depending on your relation to the deceased and other factors. Here’s what you need to know.
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INVESTMENT AND INSURANCE PRODUCTS ARE: NOT A DEPOSIT • NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
What is an inherited IRA?
If you have an IRA, you can designate one or more beneficiaries to receive the benefits of the account when you die. If someone who named you as a beneficiary dies, the broker opens an inherited IRA for you.
You can’t make additional contributions to an inherited IRA. But you can still enjoy the account’s tax benefits. You typically can withdraw the money immediately without incurring the standard 10% penalty for early distributions.
You generally can’t leave the funds in the account for as long as you want, however. In most cases, you have 10 years to withdraw the full balance.
Inherited Roth IRA distribution rules
If you inherit a Roth IRA, you generally must withdraw the funds within 10 years. But depending on your relation to the deceased and other factors, different rules may apply.
Inherited Roth IRA rules for spouses
Beneficiaries who were married to the deceased account owner have four options.
“The needs of the spouse will dictate the method,” said J.J. Sessions, a certified financial planner at The Planning Center. “If there are no immediate needs for a distribution, then pushing off the time until distribution and allowing more time for tax-free growth will be a huge benefit.”
1. Spousal transfer
You can transfer the funds to your existing or new Roth IRA instead of opening an inherited Roth IRA. In other words, you can treat them as your own going forward. Regular Roth IRA withdrawal rules apply, meaning gains typically are taxable until you reach age 59½ and have met the five-year holding period.
You can choose this option only if you are the sole beneficiary of the account.
2. Lump-sum distribution
You can take a lump-sum distribution of the funds without opening an inherited Roth IRA, allowing you to receive them all at once. Earnings are not taxable if the account is at least five years old.
3. Life expectancy method
You can open an inherited Roth IRA in your name and spread distributions over your life expectancy, based on a table provided by the IRS. You have the option to postpone distributions until the deceased would have reached age 73 or Dec. 31 of the year following the year of death, whichever is later.
You can withdraw the funds tax-free if the original Roth IRA was open for at least five years. Otherwise, gains are taxable.
If there are multiple beneficiaries and separate accounts have not been established, distributions are based on the oldest beneficiary’s life expectancy.
4. 10-year method
You can open an inherited Roth IRA in your name and withdraw the funds anytime until Dec. 31 in the 10th year after the year in which the account owner died.
If the original Roth IRA was open for at least five years, you can withdraw the funds tax-free. Otherwise, earnings are taxable.
Inherited Roth IRA rules for nonspouses
An eligible designated beneficiary other than a spouse has three distribution options.
Beyond the surviving spouse, an eligible designated beneficiary is the account owner’s minor child, a disabled individual, a chronically ill individual or any other individual who is no more than 10 years younger than the account owner.
1. Life expectancy method
You can open an inherited Roth IRA in your name and spread distributions over your life expectancy. They must begin no later than Dec. 31 of the year following the year of death.
You can withdraw the funds tax-free if the original Roth IRA was open for at least five years. Otherwise, gains are taxable.
If the IRA has multiple beneficiaries, they must open separate inherited Roth IRAs by Dec. 31 of the year following the year of death to use their own life expectancies. Otherwise, distributions are based on the oldest beneficiary’s life expectancy.
Remember that the life expectancy method is not available once a minor child of the deceased reaches age 21. At this point, the distribution option switches to the 10-year method, giving you until the 10th year after you turn age 21 to withdraw the remaining funds.
2. 10-year method
After opening an inherited Roth IRA, you have until Dec. 31 in the 10th year after the year of death to withdraw the funds. You can receive distributions on a tax-free basis as long as the original account was open for at least five years. Otherwise, earnings are taxable.
3. Lump-sum distribution
You can elect to receive the funds all at once instead of opening an inherited Roth IRA. Gains are taxable only if the original account was less than five years old.
Inherited Roth IRA rules for nondesignated beneficiaries
If the account owner didn’t designate an individual beneficiary — for example, they named their estate — a five-year rule applies. It states that nondesignated beneficiaries generally must withdraw all funds by Dec. 31 of the year containing the fifth anniversary of the account owner’s death.
This rule typically does not apply to trusts. The beneficiary of a trust is treated as a designated beneficiary to determine RMDs after the account owner’s death.
What should you do if you inherit a Roth IRA?
If you’ve been named a Roth IRA beneficiary, you may feel overwhelmed by the number of options and their potential tax implications. Here are some steps to help determine the right path for you:
- Check the designation. Review the paperwork to determine whether your loved one specifically designated you or designated their estate. If it’s the latter, your options may be limited.
- Check for other beneficiaries. If there are multiple beneficiaries on the account, you must discuss the distribution options with one another. You may want to open a separate inherited Roth IRA to ensure your distributions are based on your life expectancy.
- Review the original account status. All your distributions will be tax-free if the original IRA was open for at least five years. If it wasn’t, you must account for taxes on the gains portion of your distributions.
- Consult a tax professional and financial advisor. The tax code is complex and difficult to navigate. If you aren’t sure how to proceed or want to avoid costly mistakes, consult a tax professional and financial advisor to receive expert advice for your situation.
Remember that if you take a spousal transfer or open an inherited Roth IRA, the funds will continue to grow on a tax-free basis. Unless you need the money immediately, think twice about a lump-sum distribution.
“Stretch out the payments to stretch out the growth,” said Patrick Simasko, an elder law attorney at Simasko Law.
Why you should designate a Roth IRA beneficiary
Naming one or more Roth IRA beneficiaries is crucial to ensure your loved ones have as many options as possible.
If you don’t name a beneficiary on the account, the funds will be added to your estate, meaning your heirs generally must withdraw the balance within five years.
“Neglecting to name a beneficiary on a Roth IRA will likely leave the decision in the hands of a probate court,” said Sessions. “This time-consuming and expensive process can create complications.”
It also can eliminate privacy and make funds accessible to creditors.
Frequently asked questions (FAQs)
If you and your siblings have been named beneficiaries on a loved one’s Roth IRA, you can open either a jointly owned inherited Roth IRA or separate inherited Roth IRAs.
Normally, each sibling sets up an account in their name and the Roth is divided among them at the financial institution, Simasko said.
If you can use the life expectancy distribution method, one benefit of opening separate accounts is that your distributions are based on your life expectancy rather than the oldest beneficiary’s. Remember, though, that you must open the accounts by Dec. 31 of the year following the year of death.
Yes. Whether you’re a spousal or nonspousal beneficiary, you can avoid paying taxes on an inherited Roth IRA if the original account was open for at least five years at the time of the account holder’s death. Otherwise, the earnings portion of each distribution will be taxed.
Note that distributions from an inherited Roth IRA will not incur the standard 10% penalty for early withdrawals.
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