Will my Roth IRA be tax free if my adult kids inherit it?

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Q. I have a Roth IRA that I have had for more than five years. If I die, my wife is the beneficiary and she gets that Roth and can withdraw from it whenever, with no tax liability. But what happens if my wife predeceases me and the Roth is spilt between my two adult children? Does anything change if they liquidate the account shortly after my death?
— Dad

A. It’s a great question.

Roth IRAs are a great way to pass tax-free assets to your heirs.

The nontaxable treatment of distributions from your Roth IRA that your children will hypothetically inherit from you will indeed apply to them, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Holmdel.

“The 10-year time frame you refer to is the requirement that your children receive full distributions of any inherited IRA by Dec. 31 of the year containing the tenth anniversary of the IRA owner’s death,” he said. “Only a minor child can stretch out inherited IRA distributions over their life expectancy.”

There is no prohibition on your children receiving the entire IRA shortly after your death, he said. The distributions will remain nontaxable.

“The major difference in receiving distributions from the Roth IRA shortly after the decedent’s death, compared with delaying it for ten years, is that the beneficiaries will be giving up years of tax-deferred growth,” Becourtney said. “Distributions shortly after death, if invested, will give rise to taxable income unless invested in tax-free municipal bonds.”

The cash flow needs of the beneficiaries may outweigh the tax ramifications of delaying distributions, he said.

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This story was originally published on Jan. 7, 2022.

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