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How Do I cash Out An Inherited Roth IRA?

Thursday, May 30th 2024

Roth Individual Retirement Accounts (IRAs) have quickly grown increasingly popular due to their tax-free distributions during retirement. Unfortunately, their rules can often be complex and challenging when inheriting one; one of the most frequently asked questions regarding such accounts is: “How do I cash out an inherited Roth IRA?”. This article seeks to provide an accessible guide that answers this query directly.

Before embarking upon any procedures for cashing out an inherited Roth IRA, it is vital that one understands its fundamental principles. A Roth IRA is an individual retirement account where contributions are made using after-tax dollars – this allows future distributions, including earnings, to remain tax free after distribution – which also applies when passing it down as an inheritance – making Roths an attractive estate planning tool.

How Can You Inherit a Roth IRA?

On the death of a Roth IRA account holder, their account becomes an Inherited Roth IRA and ownership transfers to named beneficiaries. How this unfolds next depends largely upon each beneficiary’s relationship to the deceased; generally speaking, there are two categories of beneficiaries – spouse and non-spouse beneficiaries.

Spouse Beneficiaries: Exploring Spousal Transfer Options

An inheriting spouse with access to a Roth IRA may choose to transfer it as their own account – known as “spousal transfer”. Doing this provides several advantages, including not needing to take required minimum distributions (RMDs, 1) during life and being eligible to make contributions without incurring tax penalties; further allowing tax-free growth that maximizes wealth accumulation.

Non-Spouse Beneficiaries: Apply the 10-Year Rule

Non-spouse beneficiaries such as children or grandchildren often follow different rules than spouse beneficiaries do when it comes to Roth IRA accounts. Under the SECURE Act of 2019 (2), non-spouse heirs of Roth IRA accounts typically must withdraw all funds by June 30 of the 10th year posthumous; this rule has become known as the “10-Year Rule.”

How To Cash Out an Inherited Roth IRA

Here’s a step-by-step guide on how to cash out an inherited Roth IRA:

Important Considerations

Though these steps might appear straightforward, certain key considerations need to be kept in mind while cashing out an inherited Roth IRA:

Conclusion

Cashing out an inherited Roth IRA requires careful preparation and knowledge of its rules. Although the process may seem daunting initially, with expert guidance they can navigate it with confidence to preserve or even boost the value of the inheritance.

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2 Comments

  • Camelia says:

    Hi Chris,

    I saw that you started publishing a video version of some articles, and I love them. Are you planning to make one for this article? I’d like to send it to my sister.

    Best regards,

    Camelia

    • Hi Camelia,

      Thank you for your interest and your kind words about our new video project. We do plan to produce a video for each topic covered on the website but it takes time, we should be done soon.

      Happy investing!