Chicago Estate Planning and Inherited Roth IRAs

Withdrawals are usually tax-free when one inherits a Roth IRA, but minimum withdrawals are required each year using the same rules as for any inherited IRA.

A non-spouse beneficiary should have the account retitled as an inherited Roth IRA using this format: “John Doe, Deceased (date of death) Roth IRA F/B/O (for the benefit of) John Doe, Jr., Beneficiary”.

Roth IRA owners are not subject to required withdrawals during their lifetimes; however, their heirs are, beginning the year after the owner’s death. The IRS Publication 590 provides the amount to take out each year based on the heir’s life expectancy. A 50% penalty is imposed for not taking a distribution from an inherited IRA.

For multiple beneficiaries, it is preferable to split the original account into separate inherited accounts for each heir before taking the original owner’s distribution for the year he died, if it was not already withdrawn before the death. This way each heir can take distributions using his own life expectancy – a big advantage if the heirs range widely in age.

Consult your estate planning attorney for further information.