Roth and Traditional IRA's | Ed Slott and Company, LLC

Roth and Traditional IRA's

It's my understanding that when a non spouse beneficiary inherits a traditional IRA, they have the opportunity to do an inherited IRA stretch. ( At least right now that is, irrespective of any pending legislation ). To accomplish this, the inherited IRA must be titled properly, e.g. "John Smith deceased, inherited IRA for the benefit of Joan Smith, beneficiary". Then the beneficiary can stretch the RMD's over their own life expectancy, using a chart provided by the IRS. For simplicity purposes, assume there is only one beneficiary. If the non spouse beneficiary mistakenly transfers the money to their own IRA, then the stretch is null and void. Ditto, if they fail to use the correct verbiage.

It is also my understanding that a non spouse beneficiary can stretch a Roth IRA as well. Are they subject to the same rules and verbiage as the Traditional IRA? Yes, I know that Roth IRA's are not taxed, as long as the 59.5, and 5 year rules are met. Nevertheless, the non spouse beneficiary may wish to "stretch" the withdrawals out as long as possible to enjoy tax free growth on the earnings, vs emptying the account all at once.

Thanks.

  • The RMD rules for a non spouse inherited Roth IRA are basically the same as for a TIRA, except that the decedent is always treated as having passed prior to the RBD. Of course, the taxation rules for a Roth are different and typically (but not always) an inherited Roth will be non taxable.
  • An inherited IRA of either type must be titled showing both the names of the decedent and the beneficiary, in no particular order. Custodians have varying formats for titling these accounts, and if the format was not acceptable to the IRS, they would have to change it. So the beneficiary not have have to worry about the format as long as the data itself is correct.
  • If an inherited IRA is transferred to a NEW owned IRA in error, that error can usually be corrected if no distributions were taken. However, if transferred into a current owned IRA with a prior balance, correction is much more difficult and the fault would typically have to lie 100% with the receiving custodian. Correction of the title would prevent the transfer to an inherited TIRA from being taxable.
 

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