Options When You’re a Roth IRA Beneficiary

As a beneficiary of a Roth IRA, your relationship to the original owner and the age of the account determine which options you have to manage the funds.

The rules regarding inheriting Roth IRAs and other retirement accounts have changed since the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019, particularly those for non-spousal heirs.

Estate Planning with Roth IRAs

Roth IRAs are valuable estate-planning tools for account holders. As an owner, all distributions that you take in retirement are tax-free. Additionally, you can keep your money in a Roth IRA to grow and pass it on to your heirs. Unlike a traditional IRA, a Roth IRA does not have a provision for required minimum distributions RMDs at age 73.

An inherited Roth IRA once provided benefits for a lifetime to beneficiaries. Under the rules of the SECURE Act and SECURE Act 2.0, only spouses, minor children of the deceased, those who are disabled or chronically ill, and those who are not more than ten years younger than the deceased, such as a sibling can hold inherited funds in a Roth IRA account longer than ten years.

Non-qualifying heirs who inherit a Roth IRA must distribute all the assets in the account within ten years of the original owner’s death.

Why Designate a Roth IRA Beneficiary?

Roth IRA account holders should complete a beneficiary designation so that the remaining assets will be passed automatically to the beneficiaries they select. Often, the beneficiary is a surviving spouse or children, but it could be another family member or friend.

When you open a Roth IRA, you fill out a form to name your beneficiary, the person or persons who will inherit your funds after you die. Completing this form ensures the account and its tax benefits go to the person you intended.

Inheriting a Roth IRA as a Spouse

You have four options if you inherit a Roth IRA as a spouse:

Option 1: Spousal Transfer

With a spousal transfer, you treat the Roth IRA as your own. You’ll be subject to the same distribution rules as if it had originally been yours. To complete a spousal transfer, the assets will move into your named account or your existing Roth IRA.

• You can withdraw contributions at any time.
• Earnings are taxable until you reach age 59½, and it’s been at least five years since your spouse first contributed to the account, the five-year rule.
• This option is only available if you’re the sole beneficiary.
• You can designate your beneficiary.

Option 2: Open an Inherited IRA, Life Expectancy Method

Assets are transferred into an inherited Roth IRA in your name. You’ll have to take the RMDs. But you have the option to postpone them until the later of:

• The date when the original account holder would have turned age 73.
• Dec. 31 of the year following the year of death of the original account holder.

Distributions are spread over your life expectancy. However, if there are other beneficiaries, withdraws are based on the oldest beneficiary’s life expectancy unless separate accounts are established before Dec. 31 of the year following the original owner’s death.

• You can withdraw contributions at any time.
• Earnings are taxable unless the five-year rule is met.
• You won’t be subject to the 10% early withdrawal penalty.
• Assets in the account can continue to grow tax-free.
• You can designate your beneficiary.

Option 3: Open an Inherited IRA, 5-Year Rule

Under the Five-Year Rule, the assets are transferred to an inherited Roth IRA in your name. You can spread out the distributions, but you must withdraw all of the assets from the account by Dec. 31 of the fifth year following the year of the original account holder’s death.

• You can withdraw contributions at any time.
• Earnings are taxable unless the five-year rule is met.
• You won’t be subject to the 10% early withdrawal penalty.
• Assets in the account can continue to grow tax-free for up to five years.
• You can designate your beneficiary.

Option 4: Lump-Sum Distribution

If you choose this option, all of the assets in the Roth IRA are distributed to you. Contributions to the account are not taxable, but the earnings are taxable if the Roth IRA was less than five years old when the original account owner died.

Inheriting a Roth IRA as a Non-Spouse

Non-spouses include adult children, grandchildren, other family members, and friends. You have three options if you inherit a Roth IRA as a non-spouse:

Option 1: Open an Inherited IRA, Life Expectancy Method

Assets are transferred into an inherited Roth IRA in your name. You’ll be subject to RMDs that must begin by Dec. 31 of the year following the year of the original account holder’s death.

Distributions were once spread over a non- spouse’s lifetime if the heir was the sole beneficiary. But with the passage of the SECURE Act of 2019, all funds must be distributed within ten years of the original owner’s death.

When there are multiple beneficiaries, distributions are based on the oldest beneficiary’s life expectancy unless separate accounts are established before Dec. 31 of the year following the original account holder’s death.

• You can withdraw contributions at any time.
• Earnings are taxable unless the five-year rule is met.
• You won’t be subject to the 10% early withdrawal penalty.
• Assets in the account can continue to grow tax-free.
• You can designate your beneficiary.

Option 2: Open an Inherited IRA, 5-Year Rule

Assets are transferred to an inherited Roth IRA in your name, and you can spread out your distributions over time, but you have to withdraw everything by Dec. 31 of the fifth year following the year of the original owner’s death.

• You can withdraw contributions at any time.
• Earnings are taxable unless the five-year rule is met.
• You won’t be subject to the 10% early withdrawal penalty.
• Assets in the account can continue to grow tax-free for up to five years.
• You can designate your beneficiary.

Option 3: Lump-Sum Distribution

With a lump-sum distribution, the assets in the Roth IRA are distributed to you all at once. Contributions are tax-free, but earnings are taxable if the account was less than five years old when the original account owner died.

The Bottom Line

If you have a Roth IRA and don’t designate a beneficiary, the assets will be added to your estate and divided according to the laws in your state. Your heirs may lose tax benefits if you do not name them as beneficiaries. Roth IRA beneficiaries have several options, but tax consequences and distribution timelines vary.