Roth IRA inheritance after death
If someone with a Roth IRA passes away and the spouse inherits the Roth, what happens? Do the assets receive a step up in cost basis? Does the spouse transfer the assets to an account in their name? Can the spouse withdraw from the Roth?
Permalink Submitted by Alan - IRA critic on Tue, 2021-08-17 16:35
There is no basis adjustment for IRAs. A surviving spouse has two choices, either roll it over to spouse’s own Roth IRA, which is preferable in most cases, or it can be continued as an inherited Roth IRA subject to RMDs.
There are some confusing tax rules with the above options which determine how a Roth distribution made to the surviving spouse is taxed. Factors include the age of both spouses, the holding period for each Roth, and therefore if the Roth is qualified and tax free including the gains. Distributions can be made whenever needed, the question is if any portion of the distribution will be taxable.
If you want more specific info please indicate if the deceased spouse had first contributed more than 5 years ago, and the age of the surviving spouse. Also, does the surviving spouse already own a Roth IRA and when were contributions to that Roth first made.
Permalink Submitted by Simon Howe on Tue, 2021-08-17 17:03
Thanks for this info. To add more color, the deceased spouse first contributed to the current Roth in June 2016, but that was a rollover from a previous custodian. The surviving spouse is late 70s and is in the process of opening a Roth IRA in their name to roll the assets into, so no contributions have yet been made.
Permalink Submitted by Alan - IRA critic on Tue, 2021-08-17 17:31
The surviving spouse should elect to assume ownership of the inherited Roth IRA, then do a direct transfer to the newly opened Roth IRA. Since the new Roth will acquire the longer holding period of either spouse and the deceased spouse had met the 5 year holding requirement and the surviving spouse is older than 59.5, the new Roth is fully qualified and tax free. There are no RMDs, but any distributions the surviving spouse takes will be qualified distributions and reported directly on line 4a of Form 1040. 0 on 4b. Also, there will be no RMDs required of surviving spouse. Because the Roth will continue to earn tax free income, the spouse may wish to reduce distributions to only what is needed, or you use other assets for spending needs.