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inherited Roth

Missed deadline could limit inherited Roth IRA’s benefits

September 3, 2013 By Liz Weston

Dear Liz: I inherited my brother’s Roth IRA about three years ago. I find it hard to get any information about non-spousal inherited Roths. Can you tell me more about this type of Roth IRA?

Answer: It may be unfortunate that you didn’t ask sooner.

When a spouse inherits a Roth IRA, he can roll it into his own Roth IRA, and it’s as if he or she was the owner of the inherited funds all along. There’s no minimum distribution requirement, so the money can continue to grow.

If you’re not a spouse, you have the option of transferring it into an account titled as an inherited Roth IRA. You also have the option of taking distributions over your lifetime — which means keeping the bulk of the money growing for you tax-free — but to do that you must begin taking required minimum distributions by Dec. 31 of the year after the year in which the owner died.

If you didn’t start these required distributions on time, you have to withdraw all the assets in the account by Dec. 31 of the fifth year after the year your brother died, said Mark Luscombe, principal analyst for CCH Tax & Accounting North America. You won’t have to pay taxes on this withdrawal, but it would have been better to let the money continue to grow tax-free in the account.

Filed Under: Estate planning, Q&A, Retirement, Taxes Tagged With: inherited Roth, inherited Roth IRA, Roth IRA

Tax bills for inherited IRAs

August 19, 2013 By Liz Weston

Dear Liz: I am 64. My grown children, ages 23 and 25, are the beneficiaries of my retirement accounts. I have a Roth IRA, a SIMPLE IRA and a Rollover IRA. When I die, what will be the tax consequences for them? Will they have to pay any tax upon inheriting the accounts, and will they have to pay any tax when they withdraw the money over time?

Answer: If your estate is worth less than $5 million, it’s unlikely it will incur federal estate taxes. Some states have lower exemption limits and a few have inheritance taxes. New Jersey and Delaware have both. An online search for “state estate and inheritance taxes” should turn up the situation for your state.

Your children won’t have to pay income taxes on distributions from your Roth, but unlike you or a spouse they are required to take distributions once they inherit the account. They can either do so within five years of your death or they can opt to spread the distributions over their lifetimes (which is usually the better option).

Minimum distributions also will be required from your IRAs. Your heirs will have to pay income taxes on those distributions.

Advise your children to consult a tax pro after you die, since these accounts need to be properly handled and titled to get the most benefit.

Filed Under: Estate planning, Q&A, Retirement, Taxes Tagged With: estate tax, Individual Retirement Account, inherited IRA, inherited Roth, IRA, Roth, Roth IRA, roth vs. IRA, traditional IRA

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