What Happens To Your Roth IRA When You Die?

A Roth IRA is a powerful retirement tool to go along with other tax-advantaged retirement savings options. The investment account grows funds without adding a future tax burden into the mix, as it flips the script on the typical investment relationship between you and your money. Roth IRA funds are deposited post-taxation, meaning the government considers all proceeds from the account to be "already" yours rather than earned capital deserving of a tax adjustment. In contrast, the traditional IRA (here's how to open one) is funded with pre-tax dollars, so its funds are taxed later on as they're withdrawn. A combination of account types is often the best approach when managing your savings goals for retirement. But there's another aspect of this picture that sometimes flies under the radar.

Your retirement assets will one day, all going to plan, end up being distributed to your beneficiaries. If you've diligently saved for retirement, you know your goal is to create a nest egg with money left over after you die. This is the only way to ensure the funds you've generated will last through the rest of your life rather than run out halfway through your golden years. But for those who've created a potent Roth IRA portfolio and won't outlast their funds, the question of how this money will get passed on to a spouse or children is a big one that hangs over the balance. Fortunately, there are some straightforward rules attached to this question specifically. While guidance has changed with the passing of 2019's SECURE Act, the path remains clear.

Perhaps the most obvious beneficiary of a Roth IRA for many will be a spouse. Your partner can inherit the assets in your Roth IRA and treat them as if they were their own all along. This is a nearly seamless transfer of account ownership, and it is the most straightforward among Roth IRA considerations after someone has died. A spouse can then opt to take distributions as you would have, withdraw the funds as a lump-sum payout, or maintain the account virtually untouched in order to continue enjoying growth within the portfolio.

Payouts are subjected to the same rules that govern distribution of regular Roth IRA accounts; i.e., your earnings are treated as taxable income if you distribute them before turning 59 ½, among others. To give your assets to your significant other through a spousal transfer, the funds (in their existing form of stocks, cash, etc.) will be moved to a new Roth account in their name or folded into their existing Roth IRA if they have one already.

A few other options exist here, such as an inherited IRA with a life expectancy distribution method. This spreads out distributions evenly across your life expectancy and eliminates the early-withdrawal penalty if it would have applied. A five-year distribution plan or a lump-sum withdrawal are also on the table and do away with penalties as well, but only if the account is more than 5 years old.

Children cannot assume ownership of a deceased parent's Roth IRA in the same way that a spouse can. Spouses treat the account as if they already owned it, while children can claim the value of the account but won't fully take ownership, in a sense. Distributions must occur within a 10-year period of the original owner's death unless certain other features apply (such as in the case with a disabled beneficiary or minor child).

Because a Roth doesn't mandate a required minimum-distribution schedule like a traditional IRA (starting at age 73), it can be utilized as an estate-planning tool in addition to its value as a retirement asset. If you are someone who doesn't need to take distributions from this account because of other contributions to your retirement income (a pension, investment property, a healthy 401(k), and Social Security benefits, for instance), you might consider leaving your Roth IRA at the back of the line when it comes to taking out money.

If so, it will continue to grow through compound interest accumulation, providing an increasingly large nest egg for you if you ever need it and a growing estate to leave to your loved ones when you die. While distributions may ultimately be necessary as a non-spouse inheritor, they come with the same penalty-free adjustments when utilizing an inherited IRA account and standard five-year or lump sum, or life-expectancy model. (Read about what happens to your money if you should die without a will.)

You might consider naming a close friend or distant family member as a beneficiary of your Roth IRA for a range of personal reasons. Perhaps you never got married or never had children, or potentially there's another reason underpinning your decision. Either way, this is completely your choice, and naming a beneficiary that is more distant to you is entirely possible and acceptable.

The only thing you will have to keep in mind is that these beneficiaries almost certainly won't be considered qualified beneficiaries who could maintain the funds in their current state for more than 10 years. These kinds of heirs will have to opt for a distribution through one of the three inherited IRA models rather than keeping funds invested in their gifted state. This means that passing on a trust-type account isn't possible through the vehicle of the Roth IRA, but gifting assets that don't come with a tax assessment (as long as these rules are adhered to) to a beloved individual outside your immediate familial circle remains on the table.