Tax Implications of Inheriting My Ex-Husband's Roth IRA

In recent years, there have been significant updates to the regulations surrounding inherited Roth IRAs. It's crucial for individuals who inherit these accounts to understand their responsibilities and the potential tax consequences. This article will delve into the critical aspects of inherited Roth IRAs, addressing common questions and offering valuable insights for those nearing or already in retirement.

The establishment date of the original Roth IRA plays a vital role in determining the tax treatment. Generally, if the account was opened more than five tax years before the original account holder's passing, the distributions received by the beneficiary are typically tax-free. Therefore, if the Roth IRA has a long history, the distributions you receive as a beneficiary should not be subject to federal income tax.

However, it's important to note that tax withholding may have been applied to your distribution. The default withholding rate is 20%, but you can specify a different rate or request no withholding for future distributions. If you discover that tax was improperly withheld, you can reclaim the amount by adjusting your tax payment or filing an amended return.

The rules governing inherited Roth IRAs differ based on the beneficiary's relationship to the original account holder. As a non-spouse beneficiary of an account holder who passed away before 2020, you are subject to the Required Minimum Distributions (RMDs). This means you must start taking annual distributions based on your life expectancy in the year following the original account holder's death, continuing until the account is fully depleted.

It's worth noting that spouses have additional options unavailable to other beneficiaries. If you were married to the deceased account holder at the time of their passing, you could transfer the funds to your retirement account, such as an IRA or Roth IRA. This option provides greater flexibility in managing the inherited funds, treating them as if they were yours from the beginning.

For account holders who passed away in 2020 or later, a new rule known as the 10-year rule applies. Under this rule, RMDs are not mandatory for inherited Roth IRAs, but the account must be emptied within ten years of the account holder's passing.

Failing to withdraw the required RMDs from an inherited Roth IRA can result in significant penalties. Each year that an RMD is missed, a penalty is imposed, and it can accumulate substantially over time. However, there is a process for requesting penalty relief, and it is advisable to seek guidance from a tax professional to address any missed RMDs and determine the best course of action.

In conclusion, beneficiaries of inherited Roth IRAs have specific obligations and factors to consider. Individuals can make informed decisions about their inherited accounts by understanding the rules and tax implications. If you are in a similar situation, it is wise to consult with a financial advisor or tax expert who can offer personalized advice tailored to your circumstances.

Please note that the content of this article is for informational purposes only and should not be interpreted as personalized advice. Consult a qualified expert to determine the best action for your unique situation. Schedule a complimentary consultation with a financial advisor or tax expert today.

Any opinions are those of Lynch Retirement Investment Group, LLC, and not necessarily those of Raymond James or Raymond James Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.

Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, which should be discussed with the appropriate professional.

Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IA are never tax deductible, but if certain conditions are met, distributions will be completely income tax-free.

Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Each converted amount may also be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Contributions to a traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.

RMDs are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor to assess your situation.

Lynch Retirement Investment Group 2016, 2017, 2018, and 2019

John M. Lynch, CIMA®, CPWA®

John M. Lynch, CIMA®, CPWA® Managing Director – LRIG, Financial Advisor – RJFS

Andrew Fentress, CFP® Financial Advisor

Adam Tobin, CFP®, CRPC Customer Relationship Manager

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