Roth IRA Spouse Beneficiary: Know Your Options

Investing in a Roth IRA can be a great way to plan for your retirement and avoid paying future taxes. However, if you pass away, your Roth IRA will go to the beneficiary that you designate. Usually the beneficiary is a spouse. Here are a few things you need to understand about the options of an IRA:

Roth IRA Spouse Beneficiaries

When the primary account holder of the Roth IRA dies, if the beneficiary of the account is a spouse, they have a few different options. They can take the distributions from the account immediately if they choose. If they do not want to take the distributions, they could choose to keep the IRA in tact and treat it as it is their own. If they want, they can keep making contributions to the IRA and keep everything as it is. There is no minimum distribution requirements to worry about as there is with a traditional IRA. With a traditional IRA, no one has ever paid taxes on the money in the account. Therefore, the government wants you to start taking money out at the age of 70 1/2 so that they can get paid. With a Roth IRA, the taxes have already been paid, so you are free to leave it as long as you like. 

With a traditional IRA, you could open an inherited IRA account or roll the funds over into your own IRA. The Roth IRA beneficiary rules are quite a bit simpler to understand and your choices are easier. 

Tax Considerations

One of the great things about leaving a Roth IRA to your beneficiaries is the tax advantages. Since the original account holder already paid taxes on the money that went into the account, the beneficiary will not have to pay any income taxes on the money. With a traditional IRA, this is not the case. They would have to pay income tax on all of the money that they withdraw, which could potentially amount to a large tax bill in combination with their regular income. 

While you will not have to pay any income tax on the money that you receive from your spouse's Roth IRA, you may have to worry about estate taxes. If the estate is over $3.5 million, then part of the money from the Roth IRA may be taxable. However, many people will not have to worry about that tax because large value estates are rare.

Other Considerations

You will also want to consider the 5-year rule that applies to Roth IRAs. No money can be withdrawn from a Roth IRA until at least 5 years after it was opened. Therefore, let's say that your spouse opened a Roth IRA three years ago and they pass away. When this happens, you will need to wait another 2 years in order to start taking withdrawals from the account. Otherwise, you will have to pay an early withdrawal penalty on the money. 

blog comments powered by Disqus