If you’ve never encountered a Roth IRA account before and receive one as part of an inheritance then can be difficult to know what to do with it. An inherited Roth IRA account is often touted as being tax-free but this isn’t completely true as the money contained within the account will still be subject to estate tax. If the person you inherited the account from opened it less than five years ago then you may also be subjected to tax on the account too.
First of all you need to decide on what you’re going to do with the inherited Roth IRA. You should start by reading up on the Roth IRA rules if you aren’t familiar with them so that you know what is allowed and what isn’t. A Roth IRA can be a fantastic inheritance because if you treat it in the right way it can earn you money for a long time to come.
If you inherit your Roth IRA from a spouse then in most cases you’ll be able to combine your own Roth IRA and the inherited one which can avoid lots of problems such as having to make a required distribution.
Another benefit of inheriting a Roth IRA is that the age of the account isn’t reset. That means that if your spouse had the account for longer than five years then you will have already bypassed the five-year tax rule.
If you inherit a Roth IRA from one of your parents then you can split it with the rest of your siblings. Because a Roth IRA isn’t investment in itself but instead an investment vehicle when you split the account each of the siblings will have control over their own part and what it is invested in. This can help avoid any disagreements regarding potential investments.
Should you receive an inherited Roth IRA then the best thing to do is hire a professional to guide you through the process and help you get it set up in a way that it will continue to provide you with a retirement income for the future. On the other hand, If you’re thinking of opening a retirement fund with the view to giving it to your children or spouse when you die then a Roth IRA is the perfect choice as it can really provide a flexible and tax free way of planning for their retirement in the future.