The Roth IRA Tax Rules for Heirs

by Jane Meggitt

Unlike owners of traditional Individuals Retirement Accounts, owners of Roth IRAs do not pay taxes on withdrawals and are not subject to mandatory withdrawals. Although the tax rules for the account owners of traditional and Roth Individual Retirement Accounts differ, if you inherit an IRA the tax rules are the same, and there are minimum required distributions to avoid tax penalties.

Five-Year Rule

If the Roth IRA account owner died before reaching the age of 70 1/2, the beneficiary may elect to use the Internal Revenue Service's five-year rule. Under this rule, the heir may withdraw assets from the IRA in any amount, at any time, but all assets must be withdrawn by the last day of the year five years following the original account holder's death. If the account is depleted by this anniversary, there is no tax for minimum required distributions.

Spousal Inheritance

If the sole heir to the Roth IRA is the surviving spouse, he or she may either treat the IRA as if it were their own account, or delay any distributions until the date the late spouse would have reached the age of 70 1/2. Choosing either option prevents any kind of tax consequence for the Roth IRA.

Minimum Required Distribution for Multiple Beneficiaries

If the Roth IRA account owner designated several primary beneficiaries not including a spouse, there are two options for these heirs. If each heir establishes a separate inherited IRA on the last day of the year following the decedent's death, each minimum required distribution is based on the individual's Single Life Expectancy. The IRS has adopted official SLE calculations. For example, if a beneficiary inherits a Roth IRA at age 40, his life expectancy is an additional 43 1/2 years. If the separate inherited IRAs are not established by the final day of the year, the minimum distribution requirement is usually based on the SLE of the oldest heir for any accounts not established by the December 31 deadline.

Tax Penalties

If beneficiaries do not abide by the regulations for the required minimum distribution, the IRS may levy a heavy penalty -- up to 50 percent of the amount was required for withdrawal but the beneficiary did not withdraw. Consult your accountant or tax adviser if inheriting any type of IRA to establish the correct minimum required distribution and avoid penalties.

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