8.24 Distributions to Roth IRA Beneficiaries

If you are the surviving spouse of the Roth IRA owner and you are the owner’s sole Roth IRA beneficiary, you may elect to treat the inherited account as your own Roth IRA. If you treat the account as your own, you do not have to take distributions from the account at any time, since a Roth IRA owner is not subject to minimum distribution requirements. If you take some distributions, you are not locked into a specific distribution schedule unless you agree to that schedule.

Caution

Some Distributions Partly Taxable to Beneficiary

Tax treatment of a distribution you receive as the beneficiary of a Roth IRA depends on whether it would have been a qualified distribution had the owner been alive to receive it on the distribution date. If you receive the distribution before the end of the owner’s five-year holding period (8.23), and part of the distribution is allocable to earnings under the ordering rules (8.23), you must include that amount in your taxable income. However, even if you receive a taxable distribution and are under age 59½, you are not subject to the 10% early distribution penalty.

- - - - - - - - - -

Surviving spouses who do not elect to treat an inherited Roth IRA as their own, and beneficiaries other than surviving spouses, must receive required minimum distributions (RMDs). If there is an individual designated beneficiary under the final IRS regulations as of September 30 of the year following the year of the Roth IRA owner’s death (8.14), RMDs are generally payable over the life expectancy of the designated beneficiary; see the Single Life Expectancy table (Table 8-5) (8.14). If there is more than one individual beneficiary, they may split the inherited account into separate accounts by December 31 of the year following the year of the Roth IRA owner’s death, allowing each beneficiary to use his or her own life expectancy in figuring RMDs (8.14). Although it is unlikely, the plan document may require distributions under the five-year rule, which requires that the entire account be distributed by December 31 of the fifth year following the year of the owner’s death but does not require any distributions prior to that date. The plan may allow a choice between the life expectancy rule and the five-year rule. Of course, a beneficiary who is receiving RMDs under the life-expectancy method may choose to receive more than the minimum amount required under the life expectancy rule.

Failure to take an RMD will result in a penalty unless the IRS waives it. A penalty tax of 50% applies to the difference between the RMD and the amount you received.

When distributions to beneficiary must start under life expectancy rule.

For a nonspouse beneficiary, RMDs must begin by the end of the year following the year of the Roth IRA owner’s death. This is also the starting date for a surviving spouse who is a co-beneficiary of the account along with other individuals.

If you are the surviving spouse and are sole beneficiary of the Roth IRA, you may elect to treat the Roth IRA as your own and if you do, you do not have to receive any RMDs. If you do not treat it as your own and your spouse had not reached age 70½ when he or she died, you may delay the start of RMDs until December 31 of the year your spouse would have reached age 70½.

If there is no designated beneficiary under the IRS rules, such as where the Roth IRA owner’s estate is the beneficiary (8.14), the entire account must be paid out by the end of the fifth year following the year of the owner’s death.

Five-year holding period for tax-free treatment.

The same five-year holding period for receiving fully tax-free distributions that applied to the account owner (8.23) also applies to you as the beneficiary. The five-year holding period began on January 1 of the year for which the owner’s first Roth IRA contribution was made. If you receive distributions before the end of the five-year holding period, the distributions will be tax free to the extent that they are a recovery of the owner’s Roth IRA contributions and taxable to the extent they are earnings. Distributions you receive after the end of the five-year holding period are completely tax free.