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Withdrawals from Inherited Roth IRA’s

December 4, 2009

Withdrawals from an Inherited Roth IRA provide the opportunity to extend the number of years over which the account can continue to grow tax free.

In my previous entry to this site on November 22, 2009, I described the estate tax opportunities available with converting an IRA to a Roth IRA.  Those opportunities are more likely to be fully utilized if your heirs are made aware of and fully understand their options.

A Roth IRA left to your heirs is commonly referred to as an Inherited Roth IRA.  An Inherited Roth IRA is further classified as having either a Spousal Beneficiary or a Non-Spousal Beneficiary.  If the beneficiary is the account owner’s spouse (i.e. Spousal Beneficiary), the beneficiary has the option to either leave the account intact or roll the account into their Roth IRA.  Either way, the spouse is not required to take distributions during their lifetime and can designate their own beneficiaries.

If the beneficiary is not a spouse (i.e. a Non-Spousal Beneficiary), the beneficiary has the option to either take the full distribution by the end of the year marking the fifth anniversary of the account owner’s death or over the life expectancy of the beneficiary.  Planning and communication with the beneficiary are important because if distributions do not begin by December 31st of the calendar year following the owner’s death, the requirement to fully distribute the account balance within five years takes effect.  All distributions under either option are fully tax free.

Failure to take the required distributions described above results in a 50% penalty on the amount that should have been distributed.  It would be unfortunate to pay a 50% penalty on an amount that could be completely tax free.

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