Spousal inheritance of Roth IRA

Submitted by John Lau on Wed, 2019-03-06 22:52

when a beneficiary spouse inherits a Roth IRA, can she do a spousal rollover? What if he/she stays on as an inherited Roth IRA beneficiary, when does RMD begin?



Submitted by Alan - IRA critic on Wed, 2019-03-06 23:49

  • The surviving spouse can either maintain the Roth as inherited or elect to assume ownership at any point. If left as inherited, all distributions are penalty free, but not necessarily tax free. RMDs for a sole spousal beneficiary do not begin until the year the deceased spouse would have reached 70.5, same as for an inherited TIRA. An inherited spousal Roth should be changed to ownership status at age 59.5 since there is no benefit to maintaining it as inherited beyond 59.5. Electing ownership (aka spousal rollover) will also end beneficiary RMDs that may have begun. The beneficiary of the surviving spouse will also not get a new life expectancy stretch if the surviving spouse passes still taking beneficiary RMDs rather than electing ownership. That’s because the beneficiary of the surviving spouse will be treated as a successor beneficiary rather than a designated beneficiary.
  • What is more complex than RMDs are the income tax implications of this decision. For example, while the Roth is maintained as inherited, distributions will be qualified (earnings non taxable) upon completion of 5 years from the year the deceased spouse first made a Roth contribution. Until the 5 year period is completed, all distributions come first from Roth contributions and conversions (tax and penalty free). There are no taxes unless earnings are tapped before the 5 years is completed.  
  • When the surviving spouse elects ownership, the 5 year holding period begins with the oldest of any Roth that the spouse has always owned or the year the deceased spouse first made a Roth contribution. While that makes it easier to meet the 5 year holding requirement, the surviving spouse must ALSO be 59.5 for this owned Roth (no longer a beneficial Roth) to be qualified. Therefore, the first year a contribution was made and the age of the surviving spouse (in the case of ownership) must be considered in determining when either an inherited Roth or an owned Roth will be qualified. 
  • As you can see, the decision regarding when it is best to elect ownership involves both RMDs and when the Roth becomes qualified. 
  • If you have a specific situation, please post the age of the surviving spouse when the Roth is inherited, and how many years each spouse has had an owned Roth, and I can review proposed timing of an ownership election.

Submitted by John Lau on Thu, 2019-03-07 15:33

Thank you, Alan, for your response. 

Submitted by David Mertz on Thu, 2019-03-07 02:05

Since it’s not often that it’s beneficial for a spouse sole beneficiary to maintain a Roth IRA as inherited, some custodian’s Roth IRA agreements stipulate that a Roth IRA inherited by a spouse will automatically be transferred to a Roth IRA owned by the spouse with no option for maintaining the account as an inherited Roth IRA.

Submitted by William Tuttle on Thu, 2019-03-07 16:16

That seems arbritary

Submitted by Alan - IRA critic on Thu, 2019-03-07 16:45

Yes, I have heard for years about Roth IRA agreements that make the surviving spouse the Roth owner. Natalie Choate has referred to these in the past, but without naming any specific custodians. If anyone knows which custodians include this provisions, please post their names.

Submitted by David Mertz on Thu, 2019-03-07 17:20

Pershing is one if this provision (Article V, paragraph 3) in their Roth IRA Custodial Agreement has not changed since the 2016 version that I can find online.

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