When the account holder of a Roth IRA dies, most of the rules applicable to the beneficiaries of Traditional IRAs apply (see A Spouse as Beneficiary of an IRA, A Non-Spouse as Beneficiary of an IRA and IRA Beneficiary –What You Need to Know). However, there are some specific rules that are unique to Roth IRAs, especially as it relates to non-spouse beneficiaries.
Minimum Required Distributions
For non-spouse beneficiaries who choose to convert the Roth IRA to an Inherited Roth IRA, tax-free growth will be preserved, although minimum distributions will be required. These distributions will be based upon the original inheritor’s life expectancy. Distributions in excess of the minimum are allowed.
If the first contribution to the ROTH IRA was made at least 5 years prior to the death of the account owner, there are no tax consequences to any distributions.
If the ROTH IRA had been open for less than 5 years at the time of the account holder’s death and the beneficiary elects to convert the Roth to an Inherited IRA using the life expectancy method, earnings in the account will be taxable when they are distributed. Contributions will not be taxed and there will be no penalties for early withdrawals.
If the beneficiary chooses to distribute the Inherited IRA within 5 years of the account holder’s death, so long as no distributions are taken until the account would have been open for 5 years, the earnings will not be taxed upon distribution.
Determining how to distribute ROTH IRA assets upon the death of the account owner is a complicated decision that can have significant tax and asset transfer repercussions. The professionals at Core Wealth Management are committed to helping you understand your options and assist you in making the best choice given your unique circumstances.
Core Wealth Management is a fee-only wealth management firm located in Jupiter, FL. Our CFP® professionals provide investment management, financial planning, and advisory services, while always strictly abiding by the highest fiduciary standards. For more information, contact us today at 561-491-0231.
Jackie Goldstick, CFP® is the Director of Financial Planning at Core Wealth Management. She is a member of the National Association of Personal Financial Advisors (NAPFA) as well as the Financial Planning Association (FPA).