On the Your Money, Your Wealth® podcast episode #211, Joe Anderson, CFP® and “Big Al” Clopine, CPA answer a phone message from Rob:

“Joe was saying that the Roth is passed on to your kids tax-free. I was told by my tax accountant that no, it is not passed on to your kids tax-free, only to your spouse. See if they can clear that up for me, that’s a big question mark for me – alright, thanks. This is Rob and I live in Ohio, okay? Thanks.”

Read the transcript and show notes or listen to the full podcast:

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A Roth IRA is a popular investment tool among individuals looking to save for retirement. It offers the benefit of tax-free withdrawals in retirement, as long as certain requirements are met. Many parents wonder if their children will inherit their Roth IRA tax-free as well. In this article, we will explore this topic in further detail.

Firstly, it is important to understand how Roth IRA works. Contributions to a Roth IRA are made with after-tax dollars. This means that individuals contribute money that has already been taxed and do not receive any immediate tax deduction. Over time, the earnings from these contributions grow tax-free. Upon retirement, individuals can withdraw the contributions and earnings tax-free, provided that they are at least 59 and a half years old and have held the account for at least five years.

When it comes to inheriting a Roth IRA, the tax treatment depends on the relationship between the account owner and the beneficiary. Spouses who inherit a Roth IRA have the option of rolling it over into their own Roth IRA, which allows them to continue enjoying the tax-free withdrawals.

Non-spouse beneficiaries, on the other hand, are required to withdraw the funds over a period of time, either over their lifetime (known as the stretch option) or within a ten-year period following the original owner’s death. The withdrawals are tax-free, as long as the account was held for at least five years before the original owner’s death.

Therefore, if a parent were to pass away and leave their Roth IRA to their children, the children would inherit the account tax-free, provided that the account was held for at least five years prior to the parent’s death. The children would have the option of withdrawing the funds over their lifetime or within a ten-year period, depending on their preference.

It is worth noting that while the tax treatment of Roth IRAs is generally favorable, there are some exceptions. For example, if the original owner of a Roth IRA had unpaid debts at the time of their death, creditors may be able to claim a portion of the account before it is inherited by beneficiaries. Additionally, there may be estate taxes to consider, depending on the size of the original owner’s estate.

In conclusion, children can inherit a Roth IRA tax-free from their parents, provided that the account was held for at least five years before the parent’s death. The tax treatment for non-spouse beneficiaries is generally favorable, with tax-free withdrawals available over a period of time. It is important to consider potential exceptions, such as unpaid debts and estate taxes, when planning for the inheritance of a Roth IRA. As always, it is recommended to consult with a financial advisor to determine the best course of action for individual circumstances.

This article is based on a YMYW podcast episode on Will My Kids Inherit My Roth IRA Tax-Free? by Joe Anderson and Big Al Clopine.