Roth Ira

Do you have a Roth IRA but don't understand what will happen to it upon your death? Have you inherited a Roth IRA, but you are hesitant to do anything for fear of triggering penalties and taxes? Well, you have some legitimate fears. Even though, statements like, "upon death beneficiaries inherit Roth IRA tax-free" explain your account, that may not be the whole truth.

First, the estate tax can still apply to the balance of your Roth IRA as it does to a Traditional IRA. If the value of your estate totals, or exceeds, $1.5 million the federal estate tax applies to all of the inherited assets, the inherited Roth IRA included. Roth IRA's don't have any special exemptions from the estate tax, and if you own one at the time of your death, it will be a part of your taxable estate.

Roth IRA's do have one advantage when it comes to your estate. The fact that the Roth IRA is paid into with after tax dollars effectively reduces the size of the estate. While that may seem to be a disadvantage, just think of it this way. Your beneficiaries are receiving the same amount of money as if they were receiving a Traditional IRA. The tax was just prepaid.

Roth IRA's are treated pretty much the same before and after death. However, there are some notable exceptions. One, the 10% early withdrawal fee does not apply to after death distributions. Two, beneficiaries can withdraw the balance of the inherited Roth IRA even if the beneficiary is under 59 and a half, but the five year wait on distributions still applies. Three, beneficiaries may have to take distributions to according to certain rules.

If you are the spouse of the decedent who owned the Roth IRA, you are permitted to make additional contributions to it. You can also combine it with any Roth IRA you may currently own, without any conversion fees. However, if you are not the spouse of the deceased, you cannot make additional contributions or combine it with any IRA you setup.

In addition to these rules, if you are not the spouse of the deceased Roth IRA holder, you have to satisfy one of two rules for distribution. Rule one is that the entire balance will be distributed on or before the last day of the fifth year following the original owner's death. Rule two is that the balance of the inherited Roth IRA is distributed over the entire life of the beneficiary and can be passed no longer than the life of the beneficiary. Usually, the original owner specifies which rule applies to the inherited Roth IRA.

Even though the death of a loved one is one of life's hardest challenges, the paper following should not make the death that much harder. But unfortunately, it usually does. Hopefully this article has given you a little insight into how an inherited Roth IRA is to be handled.