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When you establish a Roth IRA, you're generally required to complete a beneficiary designation form with your Roth IRA custodian or trustee. The beneficiary (or beneficiaries) you name will receive the remaining funds in your Roth IRA after you die. Although choosing a beneficiary may seem straightforward, there are actually several tax and non-tax points to consider — and the beneficiary decisions you make now may have significant consequences in the future.
Whether you have a Roth IRA or a traditional IRA, your primary goal should be to choose beneficiaries for whom you want to provide. Because Roth IRAs are different from traditional IRAs, though, the considerations for choosing beneficiaries may differ. Unlike traditional IRAs, Roth IRAs are not subject to the lifetime required minimum distribution (RMD) rules (however, your beneficiaries will be required to take distributions after you die). In addition, qualified distributions paid to your Roth IRA beneficiaries are free from income tax.
It's important for your beneficiaries to receive professional tax advice as soon as practical after your death so that they may be informed of all of the options available to them and apprised of the time limits for making beneficiary-related decisions. You should also seek professional advice before making a Roth IRA beneficiary designation, because there may be income tax and estate tax consequences associated with your choice.
If you have a traditional IRA, federal law generally requires that you begin taking annual RMDs from your account by your "required beginning date" — April 1 of the calendar year following the calendar year in which you reach age 73 (75 for those who reach age 73 after December 31, 2032). In some limited cases, your choice of beneficiary can affect the way these RMDs are calculated.
By contrast, Roth IRAs are not subject to the RMD rules while you're alive; however, your beneficiaries will be required to take distributions after your death (spouses may be the exception) — see below. Consequently, if you don't need income from your Roth IRA, or if you want to preserve the funds for your beneficiaries, you don't have to take distributions from your Roth IRA during your lifetime. And if you do choose to take distributions, you do not need to follow a set schedule — you're free to withdraw as much (or as little) as you like, regardless of the beneficiaries you have named for your Roth IRA. With a Roth IRA, your choice of beneficiary has no impact on the distributions you take (or decide not to take) while you're alive.
Unlike traditional IRAs, qualified distributions from Roth IRAs may be completely free from income tax. A distribution is qualified if a five-year holding period has been satisfied, and if at least one of the following also applies:
For instance, if you made your first Roth IRA contribution on April 15, 2021 for the 2020 tax year, your contribution is treated as having been made on January 1, 2020, for purposes of the five-year rule. Distributions made on or after January 1, 2025, therefore, are considered qualified distributions. As long as your beneficiary doesn't take distributions from the inherited Roth IRA until after the five-year period has passed, the distributions will escape federal income taxation.
A single five-year holding period applies to all Roth IRAs you own for purposes of determining whether or not a distribution is qualified. You don't determine a separate five-year holding period for each Roth IRA.
A surviving spouse who treats a deceased spouse's Roth IRA as their own must independently satisfy the criteria for a qualified distribution. That is, the distribution must satisfy the five-year rule (see technical note below), and must be made either after the surviving spouse (not the deceased spouse) attains age 59½, dies, becomes disabled, or incurs qualifying first-time home buyer expenses.
A surviving spouse who treats a deceased spouse's Roth IRA as their own gets to use the earlier of the deceased spouse's Roth IRA contribution date or their own Roth IRA contribution date in determining the starting point of the five-year holding period, for both the inherited Roth IRA and any other Roth IRA the surviving spouse owns. See Treas. Reg. Section 1.408A-6, A-7(b).
If a beneficiary takes a distribution within the five-year holding period, the distribution is considered a nonqualified one. Special rules determine how (and whether) nonqualified distributions are taxed for federal income tax purposes. Because Roth IRAs are generally funded with after-tax contributions, the portion of a distribution that represents your contributions to the Roth IRA is never taxable. However, the investment earnings portion of a nonqualified distribution is subject to income tax.
Roth IRA distributions are considered to consist of contributions first and earnings last. If a beneficiary must take nonqualified distributions, therefore, they can withdraw all of the contributions tax free before tapping into taxable earnings (it gets more complicated if you've converted a traditional IRA into a Roth IRA).
Bob contributed $3,000 to his first Roth IRA in 2023 for the 2023 tax year. In 2024, he contributed another $3,000 for the 2024 tax year. Now say Bob dies in 2025. The Roth IRA will pass to the designated beneficiary of Bob's Roth IRA, Bob's brother Al. If Al takes a $3,000 distribution from the Roth IRA in 2025, it will not be a qualified distribution since the five-year period does not end until December 31, 2027. However, even though it will not be a qualified distribution, Al's $3,000 distribution will be considered to consist of Bob's contributions and will therefore not be taxable. Because Bob will have contributed a total of $6,000 before his death, Al will be able to take another $3,000 distribution within the five-year period and still owe no federal income tax. Any amount distributed on or after January 1, 2028, including earnings, will be considered a qualified distribution and will be free from income tax.
The federal 10% premature distribution penalty that may apply to premature Roth IRA distributions (i.e., nonqualified distributions taken before age 59½) does not apply to post-death distributions, regardless of your beneficiary's age or your age at the time of your death.
Beneficiary designations
Primary beneficiaries are the Roth IRA owner's first choices to receive the funds. By contrast, secondary beneficiaries (also known as contingent beneficiaries) receive the funds only in the event that all of the primary beneficiaries die or disclaim (i.e., refuse to accept) the funds.
You may also come across the term "designated beneficiary," which is not the same thing as primary or secondary (contingent) beneficiary. Designated beneficiaries are individuals (and some types of trusts) who are named beneficiaries as of the date of death and — key point — who still have assets in the Roth IRA as of September 30 of the year following the year of death, which is known as the "determination date." In other words, designated beneficiaries did not either 1) disclaim the inherited assets or 2) take a lump-sum distribution ("cash out") prior to the determination date. Financial organizations need to identify an account's designated beneficiary(ies) in order to determine the distribution options available and to appropriately calculate distribution amounts.
Neither a charity, estate, nor some types of trusts can be designated beneficiaries.
IRS regulations clarify that a designated beneficiary who dies after the death of the Roth IRA owner, but prior to the September 30 determination date, is still treated as a designated beneficiary for purposes of calculating post-death distributions from the Roth IRA.
Distributions to a designated beneficiary must be made by the end of a 10-year period (see "10-year rule" below) unless the designated beneficiary is an eligible designated beneficiary (EDB). An EDB is a designated beneficiary who is the surviving spouse of Roth IRA owner, a minor child of Roth IRA owner, an individual who is no more than 10 years younger than the Roth IRA owner, such as a close-in-age sibling, or someone who meets the IRS's definition of disabled or chronically ill. (There are special rules for certain trusts for disabled or chronically ill beneficiaries.)
Once a child reaches age 21, they can no longer be considered an EDB and must therefore follow the 10-year rule (see below).
After your death, your beneficiary (or beneficiaries) will generally have to receive the inherited retirement funds at some point. Distributions from an inherited IRA are referred to as required post-death distributions. With some exceptions, these distributions must begin by the end of the year following the year of your death.
Your beneficiary generally must withdraw any distribution required for the year of your death if you haven't yet taken it.
In addition, different types of beneficiaries will have different post-death options and be subject to different payout periods. The payout period is important because the longer the funds can remain in the Roth IRA, the more time they have to potentially benefit from tax-free growth. In most cases for Roth IRA owners dying before 2020, an individual designated as a beneficiary can take post-death distributions over his or her remaining life expectancy. For Roth IRA owners dying after December 31, 2019, only an EDB can use the life expectancy payout method for post-death distributions. Generally, the younger the EDB, the longer the payout period. A surviving spouse can generally use this method, but often has other options as well (such as the ability to roll over the inherited funds to the spouse's own Roth IRA).
Special post-death rules apply if you name a trust, a charity, or your estate as beneficiary.
Nonspouse beneficiaries cannot roll over inherited funds to their own Roth IRA.
Be aware that your beneficiaries will be subject to a federal penalty tax if required post-death distributions are not taken, or not taken in a timely manner. The penalty tax is equal to 25% (10% if corrected in a timely manner) of the undistributed required amount for a given year.
Finally, the important point is that who or what you name as your beneficiary is crucial because it will ultimately determine how the funds are paid out after you die. Estate taxes may also be a factor to consider if you expect the value of your estate and/or your spouse's estate to exceed the federal applicable exclusion amount.
When evaluating whether to initiate a rollover always be sure to (1) ask about possible surrender charges that may be imposed by both the distributing plan and the receiving plan, (2) compare investment fees and expenses charged by your IRA (and investment funds) with those charged by your employer plan (if any), and (3) understand any accumulated rights or guarantees that you may be giving up by transferring funds out of an employer plan.
The distribution methods available to your beneficiaries are similar to the options available to traditional IRA beneficiaries. (Note that special rules apply to surviving spouses who are beneficiaries.)
Your nonspousal beneficiaries will have to take post-death distributions according to one of the following methods:
No matter which payout method is selected for post-death distributions, a beneficiary can choose to receive more than the required amount in any given year. However, if a beneficiary receives less than the required amount in any given year, a federal penalty tax may be assessed. This penalty tax is equal to 25% (10% if distributed late in a timely manner) of the difference between the required distribution amount and the amount actually distributed. (This is the same penalty tax that may apply to required lifetime and post-death distributions from a traditional IRA.)
The following information is based on beneficiary distribution rule changes enacted by the SECURE Act passed in 2019. For Roth IRA owners who died prior to January 1, 2020, different rules apply. Please speak with a tax advisor.
For Roth IRA owners dying after December 31, 2019, only EDBs can use the life expectancy method. An EDB can generally take distributions over their remaining single life expectancy, beginning no later than December 31 of the year following the year of your death. If there is more than one EDB, the age of the oldest beneficiary (i.e., the one with the shortest life expectancy) must be used to calculate the distributions. (Exception: If separate accounts are established for each beneficiary, distributions will be calculated separately for each account.)
If an account owner has more than one designated beneficiary and one of them is not an EDB, then the account owner will generally be treated as not having an EDB.
If distributions do not begin by December 31 of the year following the year of death, the life expectancy method generally cannot be used.
The rules regarding separate accounts are complex. Consult a tax professional for guidance.
If both individuals and nonindividuals are named as beneficiaries of the IRA (for example, your minor child and a charity are each to receive 50%), then the individual EDBs (your child in the example) will not be able to use the life expectancy method. One way to avoid this result is to have the nonindividual beneficiary's interest in the account paid out by the September 30 date.
Individual designated beneficiaries who are not EDBs — including adult children and grandchildren of the account owner — must take distributions according to the 10-year rule. Under this method, the account must be liquidated by December 31 of the year during which the tenth anniversary of your death occurs. Beneficiaries may take distributions at any time, in any amount, during that 10-year period or may wait until year 10 to take a lump-sum distribution, but the account will need to be emptied by the end of that period.
If there are no designated beneficiaries on the account — for example, if the assets pass to your estate or a charity — required post-death distributions generally must be taken according to the 5-year rule. This method involves taking distributions in any amount and at any time within a 5-year period, which ends on December 31 of the year during which the fifth anniversary of the IRA owner's death occurs.
When planning for post-death distributions, your beneficiaries must pay particular attention to four dates: (1) nine months after your death, (2) September 30 of the year following the year of your death, (3) October 31 of the year following the year of your death, and (4) December 31 of the year following the year of your death. Each of these dates may have a tax decision or requirement associated with it.
Although the date for finalizing beneficiaries for distribution purposes is September 30 of the year following the year of your death, an IRA or plan account can be split into separate accounts up until December 31 of that same year. If separate accounts are established, each account is treated separately for purposes of determining post-death distributions. Due to the inconsistency between the September 30 and December 31 dates, it may be advisable to create separate accounts by September 30 rather than waiting until December 31. The rules governing separate accounts are complex. For more information, consult a tax professional.
Special distribution options may be available to surviving spouse beneficiaries (discussed below).
Who can you designate as your Roth IRA beneficiary? Basically, you have the same options that the owner of a traditional IRA has. Because Roth IRAs are different from traditional IRAs, though, some special considerations may apply. Your beneficiary choices generally include the following options.
If your surviving spouse is the sole designated beneficiary of your Roth IRA, they will have certain options that are not available to other types of beneficiaries. For instance, your surviving spouse can generally elect to be the new account owner of the inherited Roth IRA. Alternatively, your surviving spouse can generally elect to roll over the inherited funds to their new or existing Roth IRA. In either case, the inherited funds will be in a Roth IRA in your surviving spouse's own name. (Other types of beneficiaries must withdraw from the Roth IRA that is in your name.) This outcome is significant for two reasons:
You may not be happy that your spouse has this discretion to change beneficiaries, especially if you have children from a prior marriage, or you are concerned that your spouse might remarry and name the new spouse as the primary beneficiary.
Of course, these are not the only options available to a surviving spouse beneficiary. Your surviving spouse can also elect to disclaim the inherited Roth IRA funds, or take post-death distributions under the life expectancy method or the 10-year rule. (In most cases, though, it will be in a surviving spouse's best interest to exercise one of the unique spousal options.)
You may want to name your child, grandchild, or other individual as the beneficiary of your Roth IRA. As mentioned, most adult children, grandchildren, and other individuals more than 10 years younger than you will need to liquidate the account within 10 years. A minor child can use the life expectancy rule until they reach age 21; at that time, the 10-year rule will apply. Individuals who meet the IRS definition of disabled or chronically ill may follow the life expectancy rule.
If you name your grandchild as IRA beneficiary and have a substantial estate, the generation-skipping transfer tax (GSTT) may be an issue. Before naming any beneficiary, consider consulting a tax planning or estate planning professional for more information.
For purposes of the RMD rules, a trust cannot be a DB of an IRA even if it is a named beneficiary. However, certain beneficiaries of a trust are treated as beneficiaries of the Roth IRA owner if the trust is a see-through trust.
To be a see-through trust, the trust must meet the following requirements:
Separate application of the RMD rules to the separate interests of beneficiaries of a see-through trust is permitted if the terms of the trust provide that it is to be divided immediately upon the death of the employee into separate shares for one or more trust beneficiaries.
There is an exception to the above deadline in cases where the sole beneficiary of the trust is your spouse who is more than 10 years younger than you, and you want to base lifetime RMDs on joint and survivor life expectancy. In this case, trust documentation should be provided before lifetime RMDs begin.
There are costs associated with establishing and administering a trust, including the cost of retaining an attorney for advice and to draw up the trust agreement.
There are special rules for certain trusts for disabled or chronically ill beneficiaries.
You may name a charity as the beneficiary of your Roth IRA. Such a move may be especially attractive if you don't have any loved ones, or if you want to benefit your loved ones through other means. From an income tax standpoint, though, it's not always advisable to name a charity as your Roth IRA beneficiary. Because a qualified charity is a tax-exempt entity, the benefit of income-tax-free Roth IRA distributions is wasted on the charity. It may make more sense to benefit a loved one with the income-tax-free Roth IRA distributions, and leave a traditional IRA or other taxable assets to your favorite charity. (The beneficiaries of a traditional IRA usually have to pay income tax on their distributions. Because a qualified charity is tax exempt, though, the charity would receive the distributions tax free.)
With charities, the 5-year rule is used to take post-death distributions (i.e., all distributions will be taken on or before the end of the year during which the fifth anniversary of the account owner's death occurs).
If you name your estate as the beneficiary of your Roth IRA, the money in the account first goes to your estate, and then what's left passes to your heirs according to the terms of your will (if you have one) or through the laws of intestacy. Naming your estate as beneficiary is usually not advisable. First of all, you sacrifice some planning options. Secondly, the Roth IRA will have to pass through the probate process instead of going directly to your loved ones; this can be costly and protracted. And, it can unnecessarily expose your Roth IRA to creditors. Finally, you may not be able to stretch distributions out over 10 years or the lifetime of an individual beneficiary. Generally, the 5-year rule will apply.
There are several factors you may want to consider when selecting beneficiaries for your Roth IRA. Although your primary concern may be to provide financial security for your loved ones, you should also take into account the ages and needs of your loved ones. In addition, you should keep the Roth IRA distribution rules in mind, as well as the beneficial income tax treatment that the Roth IRA may afford.
Because choosing a Roth IRA beneficiary is an important decision, you may want to select a beneficiary with the help of a tax advisor or other qualified professional. In addition, you should review your beneficiary choices periodically to ensure that they continue to be appropriate, since your financial and personal circumstances (and those of your beneficiaries) may change over time. Fortunately, you'll generally be free to add or remove beneficiaries whenever you want (though certain restrictions may apply).
As discussed, if the five-year holding period is satisfied, your beneficiaries will not have to pay income tax on your Roth IRA funds after you die. Moreover, funds left in a Roth IRA continue to accumulate free from income tax. So, the longer the funds remain there, the more your beneficiaries may benefit from tax-free growth. This is where your choice of beneficiary can play a critical role; your beneficiary designation may determine (in part) how long the funds can remain in the Roth IRA after your death.
Your Roth IRA beneficiary choice may also affect your federal estate tax situation. Estate taxes may be a concern if you expect the value of your estate to exceed the applicable exclusion amount. The full value of your Roth IRA will be included with your other assets to determine how much (if any) federal estate tax is due from your estate.
One potential estate-tax-saving strategy may be to name your spouse as the beneficiary of your Roth IRA and other assets. The federal marital deduction allows you to leave unlimited assets to your spouse free from estate tax.
By leaving all of your assets to your spouse, you may waste your applicable exclusion amount. You may defer estate taxes, but when your surviving spouse dies, their federal estate tax liability may be higher than necessary. Consult an estate planning attorney for more information.
To take full advantage of both the unlimited marital deduction and both spouses' applicable exclusion amounts, a better strategy may be to leave some of your assets in trust for your spouse and to leave some assets to other beneficiaries. Having a potentially income-tax-free Roth IRA in a death-tax-saving trust may make more sense than having a taxable traditional IRA in there. Another possibility is to leave your Roth IRA and/or other assets to charity, allowing your estate to benefit from a charitable deduction.
Estate planning for retirement assets is complex. Consult an estate planning attorney about appropriate strategies to minimize estate taxes, and about how your Roth IRA should fit into your overall estate plan.
You must also consider how state law may affect your Roth IRA. Your spouse may have legal rights in your Roth IRA regardless of whether he or she is named as the primary beneficiary. In addition, if your roles are reversed (your spouse is the Roth IRA owner, and you are the primary beneficiary) and you die first, state law may prevent your surviving spouse from changing the beneficiary designation after your death regarding your interest in the assets (unless you grant your spouse the power to make these changes in a will or other document).
States may differ in their income tax and estate tax treatment of Roth IRA distributions. You should consult an estate planning attorney for details regarding these and other state-specific issues.
Beneficiary Designations for Roth IRAs
Introduction
When you establish a Roth IRA, you're generally required to complete a beneficiary designation form with your Roth IRA custodian or trustee. The beneficiary (or beneficiaries) you name will receive the remaining funds in your Roth IRA after you die. Although choosing a beneficiary may seem straightforward, there are actually several tax and non-tax points to consider — and the beneficiary decisions you make now may have significant consequences in the future.
Whether you have a Roth IRA or a traditional IRA, your primary goal should be to choose beneficiaries for whom you want to provide. Because Roth IRAs are different from traditional IRAs, though, the considerations for choosing beneficiaries may differ. Unlike traditional IRAs, Roth IRAs are not subject to the lifetime required minimum distribution (RMD) rules (however, your beneficiaries will be required to take distributions after you die). In addition, qualified distributions paid to your Roth IRA beneficiaries are free from income tax.
It's important for your beneficiaries to receive professional tax advice as soon as practical after your death so that they may be informed of all of the options available to them and apprised of the time limits for making beneficiary-related decisions. You should also seek professional advice before making a Roth IRA beneficiary designation, because there may be income tax and estate tax consequences associated with your choice.
You don't have to take required minimum distributions from a Roth IRA during your lifetime
If you have a traditional IRA, federal law generally requires that you begin taking annual RMDs from your account by your "required beginning date" — April 1 of the calendar year following the calendar year in which you reach age 73 (75 for those who reach age 73 after December 31, 2032). In some limited cases, your choice of beneficiary can affect the way these RMDs are calculated.
By contrast, Roth IRAs are not subject to the RMD rules while you're alive; however, your beneficiaries will be required to take distributions after your death (spouses may be the exception) — see below. Consequently, if you don't need income from your Roth IRA, or if you want to preserve the funds for your beneficiaries, you don't have to take distributions from your Roth IRA during your lifetime. And if you do choose to take distributions, you do not need to follow a set schedule — you're free to withdraw as much (or as little) as you like, regardless of the beneficiaries you have named for your Roth IRA. With a Roth IRA, your choice of beneficiary has no impact on the distributions you take (or decide not to take) while you're alive.
Qualified Roth IRA distributions are free from income tax
Unlike traditional IRAs, qualified distributions from Roth IRAs may be completely free from income tax. A distribution is qualified if a five-year holding period has been satisfied, and if at least one of the following also applies:
- You've reached age 59½ at the time of the distribution
- The distribution is made because of a qualifying disability
- The distribution is made to pay qualifying first-time homebuyer expenses ($10,000 lifetime limit)
- The distribution is made to your beneficiary or estate after your death
For instance, if you made your first Roth IRA contribution on April 15, 2021 for the 2020 tax year, your contribution is treated as having been made on January 1, 2020, for purposes of the five-year rule. Distributions made on or after January 1, 2025, therefore, are considered qualified distributions. As long as your beneficiary doesn't take distributions from the inherited Roth IRA until after the five-year period has passed, the distributions will escape federal income taxation.
A single five-year holding period applies to all Roth IRAs you own for purposes of determining whether or not a distribution is qualified. You don't determine a separate five-year holding period for each Roth IRA.
A surviving spouse who treats a deceased spouse's Roth IRA as their own must independently satisfy the criteria for a qualified distribution. That is, the distribution must satisfy the five-year rule (see technical note below), and must be made either after the surviving spouse (not the deceased spouse) attains age 59½, dies, becomes disabled, or incurs qualifying first-time home buyer expenses.
A surviving spouse who treats a deceased spouse's Roth IRA as their own gets to use the earlier of the deceased spouse's Roth IRA contribution date or their own Roth IRA contribution date in determining the starting point of the five-year holding period, for both the inherited Roth IRA and any other Roth IRA the surviving spouse owns. See Treas. Reg. Section 1.408A-6, A-7(b).
Nonqualified distributions may (or may not) be taxable
If a beneficiary takes a distribution within the five-year holding period, the distribution is considered a nonqualified one. Special rules determine how (and whether) nonqualified distributions are taxed for federal income tax purposes. Because Roth IRAs are generally funded with after-tax contributions, the portion of a distribution that represents your contributions to the Roth IRA is never taxable. However, the investment earnings portion of a nonqualified distribution is subject to income tax.
Roth IRA distributions are considered to consist of contributions first and earnings last. If a beneficiary must take nonqualified distributions, therefore, they can withdraw all of the contributions tax free before tapping into taxable earnings (it gets more complicated if you've converted a traditional IRA into a Roth IRA).
Bob contributed $3,000 to his first Roth IRA in 2023 for the 2023 tax year. In 2024, he contributed another $3,000 for the 2024 tax year. Now say Bob dies in 2025. The Roth IRA will pass to the designated beneficiary of Bob's Roth IRA, Bob's brother Al. If Al takes a $3,000 distribution from the Roth IRA in 2025, it will not be a qualified distribution since the five-year period does not end until December 31, 2027. However, even though it will not be a qualified distribution, Al's $3,000 distribution will be considered to consist of Bob's contributions and will therefore not be taxable. Because Bob will have contributed a total of $6,000 before his death, Al will be able to take another $3,000 distribution within the five-year period and still owe no federal income tax. Any amount distributed on or after January 1, 2028, including earnings, will be considered a qualified distribution and will be free from income tax.
The federal 10% premature distribution penalty that may apply to premature Roth IRA distributions (i.e., nonqualified distributions taken before age 59½) does not apply to post-death distributions, regardless of your beneficiary's age or your age at the time of your death.
Beneficiary designations
Primary, secondary, and final beneficiaries
Primary beneficiaries are the Roth IRA owner's first choices to receive the funds. By contrast, secondary beneficiaries (also known as contingent beneficiaries) receive the funds only in the event that all of the primary beneficiaries die or disclaim (i.e., refuse to accept) the funds.
Designated beneficiaries
You may also come across the term "designated beneficiary," which is not the same thing as primary or secondary (contingent) beneficiary. Designated beneficiaries are individuals (and some types of trusts) who are named beneficiaries as of the date of death and — key point — who still have assets in the Roth IRA as of September 30 of the year following the year of death, which is known as the "determination date." In other words, designated beneficiaries did not either 1) disclaim the inherited assets or 2) take a lump-sum distribution ("cash out") prior to the determination date. Financial organizations need to identify an account's designated beneficiary(ies) in order to determine the distribution options available and to appropriately calculate distribution amounts.
Neither a charity, estate, nor some types of trusts can be designated beneficiaries.
IRS regulations clarify that a designated beneficiary who dies after the death of the Roth IRA owner, but prior to the September 30 determination date, is still treated as a designated beneficiary for purposes of calculating post-death distributions from the Roth IRA.
Eligible designated beneficiaries
Distributions to a designated beneficiary must be made by the end of a 10-year period (see "10-year rule" below) unless the designated beneficiary is an eligible designated beneficiary (EDB). An EDB is a designated beneficiary who is the surviving spouse of Roth IRA owner, a minor child of Roth IRA owner, an individual who is no more than 10 years younger than the Roth IRA owner, such as a close-in-age sibling, or someone who meets the IRS's definition of disabled or chronically ill. (There are special rules for certain trusts for disabled or chronically ill beneficiaries.)
Once a child reaches age 21, they can no longer be considered an EDB and must therefore follow the 10-year rule (see below).
Your choice of beneficiary will affect required distributions after your death
After your death, your beneficiary (or beneficiaries) will generally have to receive the inherited retirement funds at some point. Distributions from an inherited IRA are referred to as required post-death distributions. With some exceptions, these distributions must begin by the end of the year following the year of your death.
Your beneficiary generally must withdraw any distribution required for the year of your death if you haven't yet taken it.
In addition, different types of beneficiaries will have different post-death options and be subject to different payout periods. The payout period is important because the longer the funds can remain in the Roth IRA, the more time they have to potentially benefit from tax-free growth. In most cases for Roth IRA owners dying before 2020, an individual designated as a beneficiary can take post-death distributions over his or her remaining life expectancy. For Roth IRA owners dying after December 31, 2019, only an EDB can use the life expectancy payout method for post-death distributions. Generally, the younger the EDB, the longer the payout period. A surviving spouse can generally use this method, but often has other options as well (such as the ability to roll over the inherited funds to the spouse's own Roth IRA).
Special post-death rules apply if you name a trust, a charity, or your estate as beneficiary.
Nonspouse beneficiaries cannot roll over inherited funds to their own Roth IRA.
Be aware that your beneficiaries will be subject to a federal penalty tax if required post-death distributions are not taken, or not taken in a timely manner. The penalty tax is equal to 25% (10% if corrected in a timely manner) of the undistributed required amount for a given year.
Finally, the important point is that who or what you name as your beneficiary is crucial because it will ultimately determine how the funds are paid out after you die. Estate taxes may also be a factor to consider if you expect the value of your estate and/or your spouse's estate to exceed the federal applicable exclusion amount.
When evaluating whether to initiate a rollover always be sure to (1) ask about possible surrender charges that may be imposed by both the distributing plan and the receiving plan, (2) compare investment fees and expenses charged by your IRA (and investment funds) with those charged by your employer plan (if any), and (3) understand any accumulated rights or guarantees that you may be giving up by transferring funds out of an employer plan.
Distribution rules for beneficiaries
The distribution methods available to your beneficiaries are similar to the options available to traditional IRA beneficiaries. (Note that special rules apply to surviving spouses who are beneficiaries.)
Your nonspousal beneficiaries will have to take post-death distributions according to one of the following methods:
- The life expectancy method
- The ten-year rule
- The five-year rule
No matter which payout method is selected for post-death distributions, a beneficiary can choose to receive more than the required amount in any given year. However, if a beneficiary receives less than the required amount in any given year, a federal penalty tax may be assessed. This penalty tax is equal to 25% (10% if distributed late in a timely manner) of the difference between the required distribution amount and the amount actually distributed. (This is the same penalty tax that may apply to required lifetime and post-death distributions from a traditional IRA.)
The following information is based on beneficiary distribution rule changes enacted by the SECURE Act passed in 2019. For Roth IRA owners who died prior to January 1, 2020, different rules apply. Please speak with a tax advisor.
Life expectancy method
For Roth IRA owners dying after December 31, 2019, only EDBs can use the life expectancy method. An EDB can generally take distributions over their remaining single life expectancy, beginning no later than December 31 of the year following the year of your death. If there is more than one EDB, the age of the oldest beneficiary (i.e., the one with the shortest life expectancy) must be used to calculate the distributions. (Exception: If separate accounts are established for each beneficiary, distributions will be calculated separately for each account.)
If an account owner has more than one designated beneficiary and one of them is not an EDB, then the account owner will generally be treated as not having an EDB.
If distributions do not begin by December 31 of the year following the year of death, the life expectancy method generally cannot be used.
The rules regarding separate accounts are complex. Consult a tax professional for guidance.
If both individuals and nonindividuals are named as beneficiaries of the IRA (for example, your minor child and a charity are each to receive 50%), then the individual EDBs (your child in the example) will not be able to use the life expectancy method. One way to avoid this result is to have the nonindividual beneficiary's interest in the account paid out by the September 30 date.
10-year rule
Individual designated beneficiaries who are not EDBs — including adult children and grandchildren of the account owner — must take distributions according to the 10-year rule. Under this method, the account must be liquidated by December 31 of the year during which the tenth anniversary of your death occurs. Beneficiaries may take distributions at any time, in any amount, during that 10-year period or may wait until year 10 to take a lump-sum distribution, but the account will need to be emptied by the end of that period.
5-year rule
If there are no designated beneficiaries on the account — for example, if the assets pass to your estate or a charity — required post-death distributions generally must be taken according to the 5-year rule. This method involves taking distributions in any amount and at any time within a 5-year period, which ends on December 31 of the year during which the fifth anniversary of the IRA owner's death occurs.
Four critical dates for taking action
When planning for post-death distributions, your beneficiaries must pay particular attention to four dates: (1) nine months after your death, (2) September 30 of the year following the year of your death, (3) October 31 of the year following the year of your death, and (4) December 31 of the year following the year of your death. Each of these dates may have a tax decision or requirement associated with it.
- To be valid, a disclaimer (refusal to accept benefits) must be signed by a beneficiary and meet other requirements no later than nine months after your death. Therefore, even though the designated beneficiaries are determined on September 30 of the year following the year of your death, a disclaimer may need to be signed much earlier to meet the nine-months-after-death rule. If a beneficiary makes such a valid disclaimer, the Roth IRA funds will generally pass to any other primary beneficiary(ies) or to the designated contingent beneficiary (if there is one).
- September 30 of the year following your death is the day to finalize the "designated beneficiaries." IRS regulations mandate that IRA beneficiary designations are final as of September 30 of the year following the year of your death. Only beneficiaries remaining on that date will be included when determining post-death distributions from the Roth IRA.
- October 31 of the year following the year of your death is the deadline for furnishing documentation relating to a trust as a beneficiary.
- If the life expectancy method is selected, distributions must begin by December 31 of the year following the year of your death. If the distributions don't begin by that date, your beneficiaries generally can't use the life expectancy method.
Although the date for finalizing beneficiaries for distribution purposes is September 30 of the year following the year of your death, an IRA or plan account can be split into separate accounts up until December 31 of that same year. If separate accounts are established, each account is treated separately for purposes of determining post-death distributions. Due to the inconsistency between the September 30 and December 31 dates, it may be advisable to create separate accounts by September 30 rather than waiting until December 31. The rules governing separate accounts are complex. For more information, consult a tax professional.
Special options available to spousal beneficiaries
Special distribution options may be available to surviving spouse beneficiaries (discussed below).
Your options when choosing Roth IRA beneficiaries
Who can you designate as your Roth IRA beneficiary? Basically, you have the same options that the owner of a traditional IRA has. Because Roth IRAs are different from traditional IRAs, though, some special considerations may apply. Your beneficiary choices generally include the following options.
Surviving spouse
If your surviving spouse is the sole designated beneficiary of your Roth IRA, they will have certain options that are not available to other types of beneficiaries. For instance, your surviving spouse can generally elect to be the new account owner of the inherited Roth IRA. Alternatively, your surviving spouse can generally elect to roll over the inherited funds to their new or existing Roth IRA. In either case, the inherited funds will be in a Roth IRA in your surviving spouse's own name. (Other types of beneficiaries must withdraw from the Roth IRA that is in your name.) This outcome is significant for two reasons:
- As a Roth IRA owner, your surviving spouse can name new beneficiaries of their choice (your children, for example). These new beneficiaries will receive the funds remaining in the Roth IRA after the death of your surviving spouse. By having new beneficiaries, the period of time for the tax-free accumulation of earnings in your Roth IRA is extended (subject to the post-death RMD rules, of course).
You may not be happy that your spouse has this discretion to change beneficiaries, especially if you have children from a prior marriage, or you are concerned that your spouse might remarry and name the new spouse as the primary beneficiary.
- As a Roth IRA owner, your surviving spouse will not be subject to the lifetime RMD rules. They can take distributions from the account if desired, but there is no requirement for them to do so. This creates the opportunity to preserve the funds in a tax-advantaged environment for the new beneficiaries.
Of course, these are not the only options available to a surviving spouse beneficiary. Your surviving spouse can also elect to disclaim the inherited Roth IRA funds, or take post-death distributions under the life expectancy method or the 10-year rule. (In most cases, though, it will be in a surviving spouse's best interest to exercise one of the unique spousal options.)
A child, grandchild, or other individual
You may want to name your child, grandchild, or other individual as the beneficiary of your Roth IRA. As mentioned, most adult children, grandchildren, and other individuals more than 10 years younger than you will need to liquidate the account within 10 years. A minor child can use the life expectancy rule until they reach age 21; at that time, the 10-year rule will apply. Individuals who meet the IRS definition of disabled or chronically ill may follow the life expectancy rule.
If you name your grandchild as IRA beneficiary and have a substantial estate, the generation-skipping transfer tax (GSTT) may be an issue. Before naming any beneficiary, consider consulting a tax planning or estate planning professional for more information.
A trust
For purposes of the RMD rules, a trust cannot be a DB of an IRA even if it is a named beneficiary. However, certain beneficiaries of a trust are treated as beneficiaries of the Roth IRA owner if the trust is a see-through trust.
To be a see-through trust, the trust must meet the following requirements:
- The trust beneficiaries must be individuals clearly identifiable (from the trust document) as DBs as of September 30 following the year of your death.
- The trust must be valid under state law or would be but for the fact that the trust lacks a trust "corpus" or principal.
- The trust must be irrevocable, or (by its terms) become irrevocable upon the death of the IRA owner.
- The trust document, all amendments, and the list of trust beneficiaries (including contingent and remainder beneficiaries) must be provided to the IRA custodian by October 31 following the year of your death.
Separate application of the RMD rules to the separate interests of beneficiaries of a see-through trust is permitted if the terms of the trust provide that it is to be divided immediately upon the death of the employee into separate shares for one or more trust beneficiaries.
There is an exception to the above deadline in cases where the sole beneficiary of the trust is your spouse who is more than 10 years younger than you, and you want to base lifetime RMDs on joint and survivor life expectancy. In this case, trust documentation should be provided before lifetime RMDs begin.
There are costs associated with establishing and administering a trust, including the cost of retaining an attorney for advice and to draw up the trust agreement.
There are special rules for certain trusts for disabled or chronically ill beneficiaries.
A charity
You may name a charity as the beneficiary of your Roth IRA. Such a move may be especially attractive if you don't have any loved ones, or if you want to benefit your loved ones through other means. From an income tax standpoint, though, it's not always advisable to name a charity as your Roth IRA beneficiary. Because a qualified charity is a tax-exempt entity, the benefit of income-tax-free Roth IRA distributions is wasted on the charity. It may make more sense to benefit a loved one with the income-tax-free Roth IRA distributions, and leave a traditional IRA or other taxable assets to your favorite charity. (The beneficiaries of a traditional IRA usually have to pay income tax on their distributions. Because a qualified charity is tax exempt, though, the charity would receive the distributions tax free.)
With charities, the 5-year rule is used to take post-death distributions (i.e., all distributions will be taken on or before the end of the year during which the fifth anniversary of the account owner's death occurs).
Your estate
If you name your estate as the beneficiary of your Roth IRA, the money in the account first goes to your estate, and then what's left passes to your heirs according to the terms of your will (if you have one) or through the laws of intestacy. Naming your estate as beneficiary is usually not advisable. First of all, you sacrifice some planning options. Secondly, the Roth IRA will have to pass through the probate process instead of going directly to your loved ones; this can be costly and protracted. And, it can unnecessarily expose your Roth IRA to creditors. Finally, you may not be able to stretch distributions out over 10 years or the lifetime of an individual beneficiary. Generally, the 5-year rule will apply.
Why your choices matter
There are several factors you may want to consider when selecting beneficiaries for your Roth IRA. Although your primary concern may be to provide financial security for your loved ones, you should also take into account the ages and needs of your loved ones. In addition, you should keep the Roth IRA distribution rules in mind, as well as the beneficial income tax treatment that the Roth IRA may afford.
Because choosing a Roth IRA beneficiary is an important decision, you may want to select a beneficiary with the help of a tax advisor or other qualified professional. In addition, you should review your beneficiary choices periodically to ensure that they continue to be appropriate, since your financial and personal circumstances (and those of your beneficiaries) may change over time. Fortunately, you'll generally be free to add or remove beneficiaries whenever you want (though certain restrictions may apply).
Income tax considerations
As discussed, if the five-year holding period is satisfied, your beneficiaries will not have to pay income tax on your Roth IRA funds after you die. Moreover, funds left in a Roth IRA continue to accumulate free from income tax. So, the longer the funds remain there, the more your beneficiaries may benefit from tax-free growth. This is where your choice of beneficiary can play a critical role; your beneficiary designation may determine (in part) how long the funds can remain in the Roth IRA after your death.
Estate tax considerations
Your Roth IRA beneficiary choice may also affect your federal estate tax situation. Estate taxes may be a concern if you expect the value of your estate to exceed the applicable exclusion amount. The full value of your Roth IRA will be included with your other assets to determine how much (if any) federal estate tax is due from your estate.
One potential estate-tax-saving strategy may be to name your spouse as the beneficiary of your Roth IRA and other assets. The federal marital deduction allows you to leave unlimited assets to your spouse free from estate tax.
By leaving all of your assets to your spouse, you may waste your applicable exclusion amount. You may defer estate taxes, but when your surviving spouse dies, their federal estate tax liability may be higher than necessary. Consult an estate planning attorney for more information.
To take full advantage of both the unlimited marital deduction and both spouses' applicable exclusion amounts, a better strategy may be to leave some of your assets in trust for your spouse and to leave some assets to other beneficiaries. Having a potentially income-tax-free Roth IRA in a death-tax-saving trust may make more sense than having a taxable traditional IRA in there. Another possibility is to leave your Roth IRA and/or other assets to charity, allowing your estate to benefit from a charitable deduction.
Estate planning for retirement assets is complex. Consult an estate planning attorney about appropriate strategies to minimize estate taxes, and about how your Roth IRA should fit into your overall estate plan.
State law considerations
You must also consider how state law may affect your Roth IRA. Your spouse may have legal rights in your Roth IRA regardless of whether he or she is named as the primary beneficiary. In addition, if your roles are reversed (your spouse is the Roth IRA owner, and you are the primary beneficiary) and you die first, state law may prevent your surviving spouse from changing the beneficiary designation after your death regarding your interest in the assets (unless you grant your spouse the power to make these changes in a will or other document).
States may differ in their income tax and estate tax treatment of Roth IRA distributions. You should consult an estate planning attorney for details regarding these and other state-specific issues.
