Roth IRA Rules of Inhertance

By Shani Valdez

  • Overview

    Roth IRA Rules of Inhertance
    Roth IRAs are an advantageous estate planning tool. There are no RMD requirements as seen with non-Roth IRAs. Roth IRAs help reduce an owner's taxable estate and tax liability; moreover, Roth IRAs provide a means for easier wealth transference. Heirs benefit profusely from compounded tax-free earnings and an inheritance that's either reduced, or totally exempted from federal estate taxes.
  • Estate Tax

    To say that a beneficiary inheriting a Roth account won't have to worry about taxes is misleading. Roth owners cover income taxes, reducing taxable estates, but that doesn't leave beneficiaries in the clear tax-wise. Taxable estates valued beyond the $3.5 million exemption leave beneficiaries facing federal estate taxes and Uncle Sam collecting 45 cents on every dollar over the exemption. With that said, owners are better situated to reduce or completely mitigate estate taxes with a Roth and better position beneficiaries tax-wise.
  • Beneficiaries

    Spousal beneficiaries may redesignate an inherited Roth as their own or distribute assets. Non-spouse beneficiaries can opt for a lump sum or annuity based payment (based on the heir's life expectancy). Annuity based payments enable non-spouse beneficiaries to retain the benefits of compounded earnings growth over his or her lifetime.


  • Seek a Tax Advisor

    Heirs should consult with a tax advisor. An advisor will review the inheritance and create a financial strategy to circumvent additional taxes administered on accounts not meeting the mandatory holding periods set forth in Roth statutory provisions. As it stands, there is a mandatory 5-year holding period for account establishment and each individual conversion. Unfamiliarity with Roth provisions can easily invite additional taxes on an unsuspecting heir.
  • Consideration

    Unfortunately, not every individual meets Roth contribution or conversion eligibility. The good news is that as of 2010 everyone is eligible for conversion, as conversion income limits are being repealed. However, Congress is looking for ways to increase tax revenue and part of that may come through new retirement provisions. Keep current on Roth statutory provisions by consulting your tax advisor or reviewing the latest version of Publication 590, as this law could be subject to change.
  • Benefits

    Individuals benefit by converting non-Roth assets next year because taxes due on that conversion will be spread out over two years versus one. Furthermore, individuals wanting to avoid the high costs associated with qualified plans, such as the 401k, should also consider conversion. Again, consult with your tax advisor to assess your financial situation, and how the conversion will fit into your financial strategy.
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