Each year I receive a number of phone calls from clients who have been named as the beneficiary of a deceased loved one’s Roth IRA. A Roth IRA is a special type of IRA for retirement savings. Some benefits of a Roth IRA are that after 59 1/2 years of age, there are no withdrawal requirements and withdrawals are tax free, including the earnings on the Roth IRA asset.
Various income and other requirements exist to determine who is permitted to establish and contribute to a Roth IRA. If you meet those requirements, then a Roth IRA may be a necessary investment in your portfolio of assets. Additionally, you are permitted to name beneficiaries who will also be able to take withdrawals income tax free in most circumstances. If you are the sole beneficiary of a Roth IRA, what are your options?
The answer to this question depends on whether or not you are a spouse of the deceased Roth IRA owner or a non-spouse of the deceased Roth IRA owner. There are different rules, depending on whether or not you are the spouse. We will discuss the spousal options in this article today.
If you are the spouse of the deceased individual, then you have various options. The easiest option is that you request a lump sum distribution from the Roth IRA. The earnings and entire distribution should not be taxable One option is a lump sum distribution in which all the assets in the Roth IRA can be distributed to you and the earnings will not be taxable so long as your spouse first contributed more than five years ago.
Another option is that you can treat the Roth IRA as your own Roth IRA. Thus, you will be subject to various distribution rules as if the Roth IRA was yours from the beginning. Those distribution rules include that you can withdraw contributions at any time, and that Roth IRA earnings will not be taxable as long as you are over 59 1/2 years of age and it has been at least five years since your spouse established the Roth IRA. You should name a beneficiary.
Finally you could create treat the Roth IRA as an inherited Roth IRA. With an inherited Roth IRA, you will be required to take required minimum distributions, but you can postpone those distributions until you would have turned age 72, or Dec. 31 of the year following the year that your spouse passed away. With this method, distributions will be spread over your lifetime. Previous contributions can be withdrawn at any time, and earnings will not be taxable as long as your spouse had first contributed to the Roth IRA at least five years ago, and the assets will continue to grow tax-free and you should designate a beneficiary.
Therefore, if you are the beneficiary of a Roth IRA owned by your spouse, please make sure you contact your investment advisor to discuss your options regarding inheriting your spouse’s 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.
Attorney James F. Contini II is a certified specialist in estate planning, Trust & Probate Law by the OSBA. He is with the firm Krugliak, Wilkins, Griffiths & Dougherty Co. LPA in New Philadelphia.