It’s a question I get asked a lot: “what happens to a Roth IRA when you die?
And even though it’s a tough subject to think about (or discuss with your family), it’s a necessary discussion to have.
A Roth IRA is a tax-advantaged retirement account that allows you to make contributions with after-tax dollars, which means you won’t pay taxes on the money you withdraw in retirement.
However, like all retirement accounts, it’s important to plan for what happens to your Roth IRA after you die.
If you don’t have a plan in place, your beneficiaries could face unexpected tax bills and missed opportunities for growth.
In this blog post, we’ll discuss what happens to a Roth IRA when you die and what steps you can take to ensure your loved ones are taken care of.
Table of Contents
Roth IRA Beneficiaries
A beneficiary is a person or entity that you designate to receive your Roth IRA assets after you die.
It’s important to choose both a primary beneficiary and a contingent beneficiary in case the primary beneficiary predeceases you or is unable to inherit the account.
If you don’t name a beneficiary, the account will go to your estate, which can be a costly and time-consuming process for your heirs.
You can change your beneficiaries at any time by completing a new beneficiary designation form.
It’s a good idea to review your beneficiaries regularly, especially after major life events like a marriage, divorce, or the birth of a child.
What Happens to a Roth IRA When the Owner Dies?
When the owner of a Roth IRA dies, the account passes to the designated beneficiary or beneficiaries.
If the beneficiary is a spouse, they have several options for what to do with the account, including rolling it over into their own Roth IRA, treating it as an inherited Roth IRA, or taking a lump-sum distribution.
If the beneficiary is not a spouse, they must begin taking Required Minimum Distributions (RMDs) from the account by December 31st of the year following the owner’s death.
The amount of the RMD is based on the beneficiary’s life expectancy and the balance of the account.
The beneficiary can choose to take the RMDs over their lifetime (also known as a “stretch IRA”) or take a lump-sum distribution.
What Happens to a Roth IRA When the Spouse Dies?
If a Roth IRA owner’s spouse dies, the surviving spouse has several options for what to do with the account.
They can roll the account over into their own Roth IRA, treat it as an inherited Roth IRA, or take a lump-sum distribution.
Rolling the account over into their own Roth IRA can provide the greatest tax benefits, as the account will continue to grow tax-free and the spouse can delay taking distributions until they reach age 73.
Estate Planning Strategies for Roth IRAs
There are several estate planning strategies you can use to ensure your Roth IRA assets are distributed according to your wishes.
One option is to create a will or trust that specifies how your assets should be distributed after you die.
You can also name a trust as the beneficiary of your Roth IRA, which can provide added control and protection for your assets.
Another option is to make charitable contributions from your Roth IRA.
If you are over age 73, you can make Qualified Charitable Distributions (QCDs) directly from your Roth IRA to a qualified charity.
This can satisfy your RMD for the year and reduce your taxable income.
What Happens to a Roth IRA When You Die FAQs
Can a Roth IRA be passed on to heirs?
Yes, a Roth IRA can be passed on to heirs after the account owner dies. When you open a Roth IRA account, you are required to designate one or more beneficiaries who will inherit the account in the event of your death. If you don’t name a beneficiary, the account will generally be distributed according to the default rules of the custodian or trustee. When a Roth IRA is inherited, the beneficiary will be subject to certain tax rules and distribution requirements. The rules depend on the relationship between the deceased account owner and the beneficiary. If the beneficiary is the account owner’s spouse, they can choose to treat the inherited account as their own and continue to contribute to it. If the beneficiary is not the account owner’s spouse, they will be required to take distributions from the account, but may be able to spread those distributions over their lifetime to minimize the tax impact.
Is an inherited Roth IRA taxable to the beneficiary?
The tax treatment of an inherited Roth IRA depends on several factors, including the relationship between the deceased account owner and the beneficiary, the age of the deceased account owner at the time of their death, and the length of time the beneficiary has owned the account.
If the beneficiary is the account owner’s spouse, they have several options for what to do with the account, including rolling it over into their own Roth IRA or treating it as an inherited Roth IRA. If they choose to treat the account as an inherited Roth IRA, they will generally not owe any taxes on the distributions they receive from the account, as long as the account was opened at least five years before the first distribution is taken. If the beneficiary is not the account owner’s spouse, they must begin taking Required Minimum Distributions (RMDs) from the account by December 31st of the year following the owner’s death. However, if the account was opened at least five years before the first distribution is taken, the beneficiary will not owe any taxes on the distributions they receive, as they are considered qualified distributions. If the account was not opened at least five years before the first distribution is taken, the earnings portion of the distribution may be subject to income tax.
Is it better to inherit a Roth or traditional IRA?
The answer to whether it is better to inherit a Roth or traditional IRA depends on your individual financial circumstances and tax situation. Here are some key factors to consider:
Tax Treatment: Roth IRAs and traditional IRAs have different tax treatments. Traditional IRAs offer an upfront tax deduction for contributions, but distributions are taxed as ordinary income in retirement. In contrast, Roth IRAs do not offer an upfront tax deduction, but qualified distributions are tax-free in retirement. When you inherit a traditional IRA, you will be required to pay income tax on the distributions you receive, while inherited Roth IRA distributions are generally tax-free.
Required Minimum Distributions (RMDs): Both traditional and Roth IRAs are subject to RMDs after the account owner reaches age 73. However, the rules for RMDs are different for inherited traditional and Roth IRAs. Inherited traditional IRAs require the beneficiary to take RMDs based on their own life expectancy, while inherited Roth IRAs allow the beneficiary to take tax-free distributions over their lifetime.
Estate Planning: Roth and traditional IRAs also have different implications for estate planning. Traditional IRAs are subject to estate tax, while Roth IRAs are generally not. This can be an important consideration for high net worth individuals who are concerned about passing on assets to their heirs.
Future Tax Rates: Another consideration is the potential future tax rates. If you believe that tax rates may be higher in the future, inheriting a Roth IRA could be more advantageous because qualified distributions are tax-free.
What happens to a Roth IRA when you die with no beneficiary?
When you die with a Roth IRA and there is no designated beneficiary, the account will generally be distributed according to the default rules of the custodian or trustee. This means that the account may be paid to your estate or may pass to your surviving spouse, depending on the specific rules of the custodian or trustee.
If the account passes to your estate, the estate will be responsible for paying any taxes owed on the account. The estate will also be subject to the rules for Required Minimum Distributions (RMDs), which require the account to be distributed over a period of five years after the owner’s death.
If the account passes to a surviving spouse, the spouse may have the option to roll the account over into their own Roth IRA or treat it as an inherited Roth IRA. In either case, the surviving spouse will generally not be required to take RMDs until they reach age 73.
It’s important to keep in mind that allowing your Roth IRA to pass to your estate can result in higher taxes and fewer distribution options for your heirs. That’s why it’s important to designate a beneficiary and keep your beneficiary designations up to date. If you don’t have a designated beneficiary, you should contact your custodian or trustee to understand their default rules and take steps to ensure your assets are distributed according to your wishes.
A Roth IRA can be an important part of your retirement planning, but it’s essential to plan for what happens to the account after you die.
By choosing beneficiaries, reviewing them regularly, and exploring estate planning strategies, you can ensure that your loved ones are taken care of and your assets are distributed according to your wishes.
It’s also a good idea to discuss your Roth IRA with your beneficiaries and financial advisor to ensure everyone is on the same page and understands the tax implications of different distribution options.
Planning for the end of life can be a difficult and emotional process, but taking the time to create a plan for your Roth IRA can provide peace of mind and financial security for your loved ones.
If you’re not sure where to start, consider reaching out to a financial coach or estate planning attorney for guidance.
They can help you understand your options and create a plan that meets your unique needs and goals.
If you haven’t already, take the time to review your Roth IRA and create a plan for the future.
Your loved ones will thank you for it.