In this video we will breakdown how to treat Inherited Roth IRAs (which differs from Inherited Traditional/Pre-Tax IRAs).

00:00 – Intro
00:38 – Tax Differences
01:22 – Beneficiary Types
03:23 – Eligible Designated Beneficiaries (Spouse)
05:45 – Eligible Designated Beneficiaries (Non-Spouse)
06:38 – Non-Eligible Designated Beneficiaries
07:27 – Non-Designated Beneficiaries
08:15 – Calls to Action

EDB –
NEDB –
NDB –

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When a loved one passes away and leaves you a Roth IRA, it’s important to understand the options, rules, and required minimum distributions that come with inheriting this type of retirement account. Inherited Roth IRAs offer unique benefits and challenges compared to traditional IRAs, so it’s essential to navigate them carefully to maximize their potential.

One of the most significant advantages of inheriting a Roth IRA is that the distributions are tax-free, as long as the account has been open for at least five years. This can provide a significant tax advantage over inheriting a traditional IRA, where the distributions are taxed as ordinary income.

When you inherit a Roth IRA, you have several options for how to handle the account. One option is to take a lump sum distribution, which allows you to withdraw the entire balance at once. However, keep in mind that this will trigger income taxes on the entire amount withdrawn.

Another option is to take annual distributions over your lifetime, also known as a stretch option. This allows you to spread out the distributions and potentially minimize the tax impact. The amount of the required minimum distribution (RMD) depends on your age and life expectancy, as specified by the IRS.

Alternatively, you can choose to liquidate the entire account within five years of the original owner’s death. This option may be beneficial if you expect to be in a higher tax bracket in the future or if you need the funds immediately.

It’s important to note that the rules for inheriting a Roth IRA differ depending on your relationship to the original account owner. Spouses have more flexibility when inheriting a Roth IRA, including the option to treat the account as their own or roll it into their existing Roth IRA. Non-spouse beneficiaries, such as children or other relatives, have different distribution requirements and must begin taking RMDs based on their own life expectancy.

When it comes to required minimum distributions, non-spouse beneficiaries must start taking distributions by December 31 of the year following the original owner’s death. Failure to take the RMDs can result in hefty penalties, so it’s crucial to stay on top of the rules and deadlines.

In conclusion, inheriting a Roth IRA can provide significant tax benefits, but it’s essential to understand the options, rules, and required minimum distributions that come with it. By carefully navigating these guidelines, you can make the most of your inherited Roth IRA and secure your financial future.