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Considerations for Non-Spousal Beneficiaries of Roth IRAs

04.22.22 written by

Considerations for Non-Spousal Beneficiaries of Roth IRAs

We had previously discussed various issues pertaining to Roth IRAs and your options if you are the spouse of an individual who passed away and owned a Roth IRA. For those individuals who are not spouses, depending on the facts and circumstances various alternatives exist that should be considered when inheriting a Roth IRA.

The first and simplest method of receiving a Roth IRA is to take a lump sum distribution of the assets in the Roth IRA.  The contributions will be tax free, and the earnings will not incur income tax so long as the initial contributions were made more than five years from the time that the decedent passed away.  Of course, the negative of this option is that most likely if you continue to invest the distribution, that you will no longer be growing your investment income tax free.

The next option is to open an inherited IRA. Under the previous rule for a Roth IRA, the Roth IRA was transferred into the beneficiary’s name, and the beneficiary was required to withdraw required minimum distributions that began no later than December 31 of the year following the year of death of the decedent. A required minimum distribution is a distribution that is calculated based on the life expectancy of the beneficiary if that beneficiary was the sole beneficiary. However under the Setting Every Community Up for Retirement Enhancement Act of 2019 (“Secure Act”), this rule was changed and now the beneficiary has to withdraw all of the Roth IRA no later than 10 years after the death of the decedent.  You can withdraw Roth IRA contributions at any time and the Roth IRA earnings will not be taxable, so long as the decedent first contributed more than five years ago to the Roth IRA. The income and growth on the assets in the account will continue to tax free.  You should also designate a beneficiary of the Roth IRA.

The next option is to have the Roth IRA distributed to you over five years. In this option, the assets will be transferred into an inherited Roth IRA in the name of the beneficiary.  The distributions from the Roth IRA will be paid out so that all of the assets are distributed to you no later than December 31 of the fifth year following the year of death of the decedent. Once again, you can withdraw contributions to the Roth IRA at any time, and the Roth IRA earnings will continue to grow and not be taxable depending on the timing of the initial Roth IRA contribution.  You should designate your own beneficiary of your Roth IRA.

Therefore, if you are the beneficiary of a Roth IRA, you should contact your investment advisor to determine what your options are regarding the Roth IRA.

NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.

James F. Contini II, Esq.
Certified Specialist in Estate Planning,
Trust & Probate Law by the OSBA
Krugliak, Wilkins, Griffiths & Dougherty Co., L.P.A.
405 Chauncey Avenue NW
New Philadelphia, Ohio 44663
Phone:  (330) 364-3472
Fax:  (330) 602-3187