Q: If I inherit a Roth IRA from someone I'm not married to, will that IRA's future investment gains be tax-free -- that is, if I leave the money in the account? --MA via email
A: The Roth IRA's investment earnings will continue to be tax-free. But you won't be able to leave all the money in the account.
This is the main difference between being the owner of a Roth IRA and being the account's beneficiary. An owner never has to take any distributions from a Roth IRA, regardless of his age. A non-spouse beneficiary must take minimum annual distributions based on his or her life expectancy. (Someone who inherits a spouse's Roth IRA can become its owner, by transferring the inherited account into a new Roth IRA in his or her own name. )
The annual distributions you must take from the Roth IRA are tax-free -- but don't underestimate their importance!
The penalty for failing to take them is 50% of the amount you should have withdrawn, but didn't.
If your minimum annual distribution was $2,000, for example, but you took nothing out of the account, the penalty would be $1,000.
The good news is that because the balance in the account keeps growing untaxed, an inherited Roth IRA can grow into a much bigger nest egg if you can afford to take no more than the minimum required distributions while you're still working.
If you inherit a $150,000 Roth IRA at age 45, for example, your first required annual distribution will be $3,866 ($150,000 divided by your 38.8 year life expectancy). If you take only minimum distributions and earn an average 7% annual return, the account will have doubled in size by the time you're 65.
Please send your questions to [email protected]. I'm sorry I can't respond personally to every email. Questions are only addressed online.(c) Lynn Brenner, All Rights Reserved
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