Options When You’re a Roth IRA Beneficiary

Pay careful attention to these, or you could pay a big penalty

If you’re the beneficiary of a Roth individual retirement account (IRA), you may have several options—including opening an inherited Roth IRA. But your relationship to the original owner and the age of the account determine which options you have.

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 and the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020. Read on to understand your options.

Key Takeaways

  • As a Roth individual retirement account (IRA) holder, it’s important to name a beneficiary so that the money you saved goes where you intended, with the most tax benefits possible.
  • If you inherit a Roth IRA as a spouse—and you’re the sole beneficiary—you have the option to treat the account as your own.
  • Some beneficiaries have the option to stretch out the distributions over a period of 10 years, which can offer significant tax benefits.
  • All required minimum distributions (RMDs) were waived for 2020 under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, but the rules were restored for the 2021 tax year.

Estate Planning with Roth IRAs

Roth IRAs are particularly valuable as estate-planning tools. With traditional IRAs, you have to begin taking required minimum distributions (RMDs) at age 72. As you do so, you pay taxes on the money that you take out.

With a Roth IRA, however, there are no RMDs. And all of the distributions that you do take in retirement are tax free. This means that you either have full use of all of it, with no tax hit, or you can leave your money in a Roth IRA to grow and pass it on to your heirs.

Previously, an inherited Roth IRA could be left alone for a lifetime. But under the rules of the SECURE Act, only certain beneficiaries can access the lifetime benefit—namely, spouses, minor children of the deceased, those who are disabled or chronically ill, and those who are not more than 10 years younger than the deceased, such as a sibling.

Anyone else inheriting a Roth IRA must distribute all the assets in the account within 10 years of the original owner’s death.

The 2020 CARES Act waived the rules for RMDs on IRAs for the 2020 tax year, and any distributions could be repaid over a three-year period. This applied to those directly affected by the COVID-19 pandemic.

Why Designate a Roth IRA Beneficiary?

A Roth IRA can be a fundamental part of your estate plan. But none of its benefits can be used if you don’t complete your beneficiary designation.

Any Roth IRA assets that you haven’t withdrawn will be passed automatically to the beneficiaries whom you select. Often, the beneficiary is a surviving spouse or your 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(s) who will inherit your account after you die. This form is more important than many people realize. If you leave it blank, then the account may not go to the person you intended, and some of the tax benefits could be lost.

To avoid problems, be sure that you name a beneficiary—and keep it updated following events like marriage, divorce, death, or the birth of a child.

If you’re a Roth IRA beneficiary, your options vary depending on whether you inherit it as a spouse or a non-spouse. Here’s a rundown of the options for each situation.

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. This means that you’ll be subject to the same distribution rules as if it had been yours to begin with. To complete a spousal transfer, you’ll transfer the assets into your own new or existing Roth IRA.

Other considerations:

  • 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).
  • The option is only available if you’re the sole beneficiary.
  • You can designate your own beneficiary.

Option 2: Open an Inherited IRA, Life Expectancy Method

With this option, the 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 72
  • Dec. 31 of the year following the year of death (when the original account holder died).

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

Other considerations:

  • 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 own beneficiary.

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

Under the Five-Year Method, 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.

Other considerations:

  • 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 own beneficiary.

Option 4: Lump-Sum Distribution

If you choose this option, all of the assets in the Roth IRA are distributed to you. There’s no tax on contributions in the account. But the earnings are taxable if the account was less than five years old when the original account owner died.

The original account holder’s Roth IRA provider can help you understand your options, but they can’t give you advice or recommendations.

Inheriting a Roth IRA as a Non-Spouse

Non-spouses include 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

With the Life Expectancy option, the 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.

Previously, distributions were spread over a non-spouse’s lifetime, assuming that the person was the only beneficiary. But with the passage of the SECURE Act, all distributions must be distributed within 10 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 year of the original account holder’s death.

Other considerations:

  • 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 own beneficiary.

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

With this option, the assets are transferred to an inherited Roth IRA in your name. 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.

Other considerations:

  • 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 own 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.

What happens when the owner of a Roth individual retirement account (IRA) dies?

Distributions must be made from your Roth individual retirement account (IRA) after you die. You are able to direct the distribution of the funds upon your death. You name the beneficiaries, and the funds will pass directly to your beneficiaries without being subject to probate.

Do heirs pay taxes on Roth IRAs?

Heirs, in most cases, can take tax-free withdrawals from a Roth IRA over a 10-year period. Spouses who inherit Roth IRAs can treat the accounts as their own.

Who qualifies as a designated beneficiary?

Any of the following individuals are considered an eligible designated beneficiary (EDB):

  • A surviving spouse
  • A disabled or chronically ill individual
  • An individual who is not more than 10 years younger than the IRA owner
  • A child of the IRA owner who is still a minor

The Bottom Line

If you have a Roth IRA and don’t designate a beneficiary, then it could get lumped into your total estate and divided according to the laws in your state. Your spouse or children ultimately may end up with your money, but they won’t have access to the same tax benefits as if you had named them as beneficiaries.

If you’re a Roth IRA beneficiary, you have several options. It’s important to consider your choices carefully, since the tax consequences may vary. It’s helpful to consult with a trusted financial advisor who can help you determine your best option when you inherit a Roth IRA.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. U.S. Congress. “H.R.748 — CARES Act.”

  2. U.S. Congress. “H.R.1994 — Setting Every Community Up for Retirement Enhancement Act of 2019.”

  3. Internal Revenue Service. “Retirement Plan and IRA Required Minimum Distributions FAQs.”

  4. Internal Revenue Service. “Roth IRAs.”

  5. Internal Revenue Service. “Retirement Topics — Beneficiary.”

  6. Internal Revenue Service. “Publication 590-B (2020), Distributions from Individual Retirement Arrangements (IRAs).”

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