If you're the beneficiary of a Roth 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 SECURE Act in 2019 and the CARES Act in 2020. Read on to understand your options.

Key Takeaways

  • It’s important to name a beneficiary so 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) are temporarily waived as a result of the 2020 CARES Act.

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 you take out.

With a Roth IRA, however, there are no RMDs. And all the distributions you do take in retirement are tax-free. That means 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.

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.

Due to the passage of the 2020 CARES Act, the rules for required minimum distributions (RMDs) on 401(k) plans and individual retirement accounts (IRAs) have been waived, along with the 10% fee on early withdrawals of up to $100,000 from 401(k)s. Any distributions can be repaid over a three-year period. The rules apply to someone directly affected by the COVID-19 pandemic or who experiences economic hardship as a result of it.

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 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, the account may not go to the person you intended, and some of the tax benefits could be lost.

To avoid problems, be sure you name a beneficiary—and keep it up-to-date 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 as 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. That means 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 "5-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 required minimum distributions. But you have the option to postpone them until the later of:

  • The date 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, 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 death.

Other considerations:

  • You can withdraw contributions at any time.
  • Earnings are taxable unless the 5-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 the assets from the account by Dec. 31 of the fifth year following the year of death

Other considerations:

  • You can withdraw contributions at any time.
  • Earnings are taxable unless the 5-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 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 required minimum distributions that must begin by Dec. 31 of the year following the year of death.

Previously, distributions were spread over a non-spouse's lifetime, assuming 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 death.

Other considerations:

  • You can withdraw contributions at any time.
  • Earnings are taxable unless the 5-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 death.

Other considerations:

  • You can withdraw contributions at any time.
  • Earnings are taxable unless the 5-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.

The Bottom Line

If you have a Roth IRA and don’t designate a beneficiary, it could get lumped into your total estate and divided according to the laws in your state. Your spouse or children may ultimately end up with your money, but they won’t have access to the same tax benefits as if you had named them as beneficiaries. And to make life easy for them (and you), open one as soon as you can to avoid 5-year-rule problems.

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.