The Roth IRA Inheritance Rules

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While there are some fundamental differences between a traditional Individual Retirement Account (IRA) and a Roth IRA, rules regarding account distribution in the event of the account owner's death are quite similar. The Internal Revenue Service (IRS) provides specific instructions to follow in the event of a Roth owner's death, and the distribution rules vary depending on whether the beneficiary is a spouse or a non-spouse.You should also be aware of the special tax provisions of Roth IRAs, and how they might apply in the event of the account owner's death.

Spousal Beneficiary Rules

As a spousal beneficiary, you are entitled to treat the inherited IRA as your own if you desire. By treating the IRA as your own, you are allowed to make regular or conversion contributions to the account if you were allowed to do so in your own account. Further, you are not required to take any distributions from the account at all. If you are a younger beneficiary, a possible downside in treating the IRA as your own is that you will not be allowed to take tax- or penalty-free distributions from the account until you turn 59 1/2.

Non-spouse Beneficiary Rules

When you inherit an IRA, your distribution varies based on on whether the deceased has begun taking required minimum distributions. As a Roth IRA carries no mandatory distribution provision, you can treat the Roth inheritance as if death occurred before the required minimum date. Unlike a spouse, you cannot treat the Roth IRA as your own, meaning you cannot combine it, add to it, or put it in your own name. As a result, you are left with two options: (1) Withdraw the entire account balance by December 31st of the 5th year following the year of the account owner's death or (2) take distributions over your life expectancy, or over a period not extending beyond your life. You can make your selection by December 31st of the year following the year the death occurred. In the case of an inherited IRA, non-spouse beneficiaries are not subject to the 10 percent penalty tax if they are under the age of 59 1/2.

Five-Year Withdrawal Rule

While some distribution rules change in the event of a Roth IRA account owner's death, one important one does not. Specifically, even in the event of the owner's death, a Roth IRA must exist for at least 5 years before earnings can be withdrawn tax-free. Thus, if the owner dies shortly after the Roth is established, the beneficiary may have to pay tax on the earnings withdrawal. Only account earnings are taxed, not original contributions, so if the withdrawal is made shortly after the account is opened, the tax liability may not yet be very large.