When a love one leaves you a Roth IRA, know the rules
Outside of a corn maze, losing a relative is never fun. When their death comes with money attached, it can create more headaches and despair. Your choices for what you can do with an inherited IRA depend on whether its from your spouse or from someone else.
Inherited from a spouse
A spouse who inherits an IRA can either move the money into a new or existing traditional or Roth IRA in their name or put it into an inherited IRA (an inherited account can also be “disclaimed” for estate planning purposes—talk to an attorney if you want to leave the money to your heirs).
Just like a regular conversion, moving money from a non-Roth IRA to a Roth will require you to pay taxes on the amount converted—that could be a big hit with a large account.
If a Roth isn’t for you, choosing between a traditional and inherited IRA depends largely on your age and your immediate financial needs. If you’re older than 70 ½ and the deceased spouse was younger, an inherited IRA allows you to delay minimum required distributions until the year the spouse would have turned 70 ½. Traditional IRAs are better for widowers who are younger than their spouses, and younger than 70 ½--they can delay distributions until that time.
If you inherit an IRA from a spouse, are younger than 59 ½, and need the money right away, go with an inherited IRA. You won’t be subject to a 10% early withdrawal penalty.
Inherited from someone other than a spouse
If your dear Aunt Millie leaves you her IRA assets, you options are more limited than if you receive them from a spouse. You’re required to begin taking minimum distributions the tax year after the person dies; the amount is a formula based on your life expectancy, as defined by the IRS).
You can also liquidate the account entirely and pay taxes on the income.
Important Roth Information
Each year, the IRS updates the rules for IRAs. Here are all the details for 2016: