Rules of inheriting a traditional or Roth IRA

by Badgley Phelps | Sep 19, 2019

Are you a beneficiary of someone else’s Roth or traditional IRA? If so, you have an important decision to make regarding how to title your new account. This decision will have an impact on the timing and amount of taxes you pay now and in the future. The rules are different depending on whether the IRA is Roth or traditional, and whether you’re a spouse or non-spouse. What follows is a basic overview of the rules of inheriting a traditional or Roth IRA according to the Internal Revenue Service (IRS). We recommend that you consult with your tax advisor before making a final decision.

Traditional IRA: spouse inherits

If you are the surviving spouse, you have two main options:

  1. Treat the IRA as your own by transferring the assets into a new or existing IRA; or
  2. Transfer the assets to an inherited IRA.

The main difference between the two is that an inherited IRA must be distributed in five years or over your lifetime, while your own IRA will be subject to the same distribution rules as if it had been yours originally. One important note is that with either of these options, if the decedent is over 70 ½ a Required Minimum Distribution (RMD) will need to be made by 12/31 in the year of death. A less popular third option would be to take the entire IRA as a lump sum. In this case the entire distribution is taxable in the year it is taken.

Traditional IRA: non-spouse inherits

If you are a non-spouse beneficiary, you do not have the option of transferring the funds into your own IRA. You can either take a lump sum or transfer the funds to an inherited IRA with distributions beginning in the year after death and continuing over your life expectancy.

Non-spouse beneficiaries often take the opportunity to consider whether it makes sense to convert a traditional IRA to a Roth IRA.

Roth IRA: spouse inherits

If you are the spouse and sole beneficiary of a Roth IRA, you have the option to transfer the assets into a new or existing Roth of your own or to an inherited Roth IRA. It is important to note that your own Roth IRA will not have Required Minimum Distributions (RMDs), while the inherited Roth IRA will have RMDs starting in the year the decedent would have turned 70 1/2. In either case there are no income taxes due as long as your spouse’s Roth IRA account was held for five years.

Roth IRA: non-spouse inherits

As a non-spouse inheriting a Roth IRA you can either take a lump sum distribution (no tax on the earnings as long as the account is more than five years old) or transfer the funds to an inherited Roth IRA. With an inherited Roth IRA you will need to begin taking distributions the year following the death and distribute over five years or over an annuity period representing your life expectancy.

If you will be inheriting a Roth or traditional IRA and would like to discuss your individual situation, please contact us.


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Rules of inheriting a traditional or Roth IRA

by Badgley Phelps | Sep 19, 2019

Are you a beneficiary of someone else’s Roth or traditional IRA? If so, you have an important decision to make regarding how to title your new account. This decision will have an impact on the timing and amount of taxes you pay now and in the future. The rules are different depending on whether the IRA is Roth or traditional, and whether you’re a spouse or non-spouse. What follows is a basic overview of the rules of inheriting a traditional or Roth IRA according to the Internal Revenue Service (IRS). We recommend that you consult with your tax advisor before making a final decision.

Traditional IRA: spouse inherits

If you are the surviving spouse, you have two main options:

  1. Treat the IRA as your own by transferring the assets into a new or existing IRA; or
  2. Transfer the assets to an inherited IRA.

The main difference between the two is that an inherited IRA must be distributed in five years or over your lifetime, while your own IRA will be subject to the same distribution rules as if it had been yours originally. One important note is that with either of these options, if the decedent is over 70 ½ a Required Minimum Distribution (RMD) will need to be made by 12/31 in the year of death. A less popular third option would be to take the entire IRA as a lump sum. In this case the entire distribution is taxable in the year it is taken.

Traditional IRA: non-spouse inherits

If you are a non-spouse beneficiary, you do not have the option of transferring the funds into your own IRA. You can either take a lump sum or transfer the funds to an inherited IRA with distributions beginning in the year after death and continuing over your life expectancy.

Non-spouse beneficiaries often take the opportunity to consider whether it makes sense to convert a traditional IRA to a Roth IRA.

Roth IRA: spouse inherits

If you are the spouse and sole beneficiary of a Roth IRA, you have the option to transfer the assets into a new or existing Roth of your own or to an inherited Roth IRA. It is important to note that your own Roth IRA will not have Required Minimum Distributions (RMDs), while the inherited Roth IRA will have RMDs starting in the year the decedent would have turned 70 1/2. In either case there are no income taxes due as long as your spouse’s Roth IRA account was held for five years.

Roth IRA: non-spouse inherits

As a non-spouse inheriting a Roth IRA you can either take a lump sum distribution (no tax on the earnings as long as the account is more than five years old) or transfer the funds to an inherited Roth IRA. With an inherited Roth IRA you will need to begin taking distributions the year following the death and distribute over five years or over an annuity period representing your life expectancy.

If you will be inheriting a Roth or traditional IRA and would like to discuss your individual situation, please contact us.


KidsHeadStartIRA_CTA

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