Roth IRA Beneficiary Options and Reporting Requirements
By Kristiana Rodriguez
Although IRAs are meant to provide individuals with a source of income during retirement, many clients may want to incorporate their IRAs into their overall estate planning. In such cases, while making clear that you are not providing tax or legal advice, you may find yourself discussing IRA beneficiary options with clients. Beneficiary options—especially for Roth IRAs—can be confusing. For example, many clients wonder if the five-year period for tax-free earnings applies to Roth IRA death distributions, or if the beneficiary must pay taxes on any Roth IRA assets that they inherit.
For many who inherit IRA assets, their options and obligations may be determined by whether an IRA owner’s death occurred “before, or on or after, the required beginning date (RBD)”. The RBD is the date by which an IRA’s required minimum distributions (RMDs) must begin. But because Roth IRA owners never have to take RMDs, they are always considered to have died before the RBD—regardless of their actual age at the time of death. As a result, Roth IRA beneficiaries generally have the same options that Traditional or SIMPLE IRA beneficiaries have if an IRA owner dies before the RBD. This article explains some of the more common questions surrounding Roth IRA beneficiary options
Five-Year Period for Inherited Roth IRAs
As with all Roth IRAs, all prior contributions and all conversions are distributed before any earnings. But to distribute all funds from an inherited Roth IRA tax-free—specifically its earnings—a five-year period, or “clock,” must be satisfied. The five-year period is not redetermined when the Roth IRA owner dies. A beneficiary is credited with any years attributable to the Roth IRA owner. If a nonspouse beneficiary has her own Roth IRA, her personal five-year period is determined separately from her inherited Roth IRA assets. If, however, the beneficiary is a spouse who treats the Roth IRA as her own, the five-year period is satisfied at the earlier of
the end of the five-year period for the decedent or
the end of the five-year period for the spouse’s own Roth IRA(s).
The five-year period begins on the first day of the taxable year (January 1 for most taxpayers) for which the Roth IRA owner makes his first Roth IRA contribution. As stated above, earnings will be taxable if a beneficiary distributes them before the five-year period has been satisfied. It is up to the beneficiary to know whether the five-year period has been met, and to identify whether any portion of a distribution is taxable, by filing IRS Form 8606, Nondeductible IRAs, for any tax year in which a distribution is taken.
Roth IRA Death Distributions – Form 1099-R Custodian Reporting
The distribution codes for Roth IRAs differ from Traditional IRAs, even for death distributions. Where code 4, Death, is used to report death distributions from a Traditional IRA, codes Q, Qualified distribution from a Roth IRA, or T, Roth IRA distribution, exception applies, are used to report Roth IRA distributions to a beneficiary. The tax treatment of Roth IRA distributions to beneficiaries depends on whether the distribution is considered qualified or nonqualified. If a Roth IRA distribution is qualified, all distributed assets are tax-free. If a distribution is nonqualified, some of the assets (generally the earnings) may be subject to regular income tax.
Death is the penalty tax exception for Roth IRA beneficiaries. A beneficiary will not be subject to the 10 percent early distribution penalty tax for removing assets that they inherit from a Roth IRA owner, including taxable amounts.
Roth IRA Beneficiary Options
While you as custodian do not need to determine whether the Roth IRA owner died before, or on or after the RBD, you will need to know whether the death occurred on or after January 1, 2020: the date of death will affect the distribution options available to the beneficiaries.
At a glance
“Death Before RBD” options generally apply for Roth IRA beneficiaries.
No annual payments are required for Roth IRA beneficiaries who choose the 10- or 5-year rule.
Spouse beneficiaries may delay taking life expectancy payments until the Roth IRA owner would have attained the applicable RMD age.
Beneficiary Types
An “eligible designated beneficiary” is a spouse, an IRA owner’s minor child, a disabled individual, a chronically ill individual, an individual who is not more than 10 years younger than the IRA owner, or beneficiaries of IRA owners who died before January 1, 2020.
A “designated beneficiary” is an individual who is not an eligible designated beneficiary.
A nonperson beneficiary is an entity, such as a charity, estate, or a trust that does not meet the criteria of a see-through trust (discussed later).
Lump Sum
Any beneficiary may elect to withdraw the entire portion of the IRA in a single distribution, regardless of the type of IRA, the relationship to the deceased IRA owner, or whether the IRA owner died before, or on or after the RBD.
Five-Year Rule
While the five-year rule was an available option for all beneficiary types before January 1, 2020, it now applies only to nonperson beneficiaries of IRA owners who died on or after January 1, 2020. Under the five-year rule, the beneficiary must distribute the entire balance by December 31 of the year containing the fifth anniversary of the IRA owner’s death. No annual payments are required in years one through four.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act waived the RMD requirement for IRA owners and beneficiaries for the 2020 calendar year. For purposes of counting the five-year period, 2020 is disregarded and one year is added to the remaining period. For example, for deaths occurring in 2019, the five-year period in which the inherited assets must be distributed will end on December 31, 2025, instead of December 31, 2024.
10-Year Rule
The 10-year rule is available to Roth IRA designated beneficiaries and eligible designated beneficiaries. Certain see-through trusts may also be able to use the 10-year rule. The 10-year rule allows Roth IRA beneficiaries to take distributions in any amount at any time—as long as they deplete their portion of the Roth IRA by December 31 of the year containing the 10th anniversary of the Roth IRA owner’s death. No annual payments are required in years one through nine, but a total distribution is required by December 31 of the tenth year.
Life Expectancy Payments
The life expectancy payment option requires most eligible designated beneficiaries to take annual minimum distributions based on the beneficiary’s single life expectancy, nonrecalculated. Beneficiaries who fail to take the required amount timely may be subject to an excess accumulation penalty tax equal to 25 percent of the amount that should have been taken but was not. If a failure to take
the RMD is corrected in a timely manner, the penalty tax on the failure may be reduced to 10 percent.
Spouse beneficiaries can delay taking life expectancy payments until the Roth IRA owner would have reached the applicable RMD age, even though RMDs do not apply to Roth IRAs. All other eligible designated beneficiaries who choose to take life expectancy payments must begin distributions in the year following the year of death.
The Uniform Lifetime Table
The 2024 proposed RMD regulations allow spouse beneficiaries to be treated as the “employee” in an employer plan, or the account owner of an IRA, when determining the applicable denominator used for life expectancy calculations. This permits spouse beneficiaries to use the Uniform Lifetime Table instead of the Single Life Expectancy Table when calculating their payment amounts. This election, if allowed by the IRA document, is only available to spouse beneficiaries whose first life expectancy payment is due in 2024 or later. If the Uniform Lifetime Table is elected, all payment amounts will be calculated based on the spouse’s age, using the recalculation method.
Practically speaking, this is likely to be more applicable to employer plans than to IRAs, given the fact that a spouse beneficiary more often than not will eventually treat the IRA as “his own,” either by transfer, rollover, or by re-registering in his own name.
NOTE: The IRS released Announcement 2025-2 in December 2024, delaying the anticipated applicability date for certain provisions (including this provision) of the proposed RMD regulations. Until the new regulations take effect, taxpayers must apply a reasonable, good-faith interpretation of the statutory provisions underlying the amendments.
Transfer or Distribution and Rollover
Only a spouse beneficiary may transfer or distribute and roll over a decedent’s IRA assets to her own IRA.
A spouse beneficiary may transfer inherited assets to his own Roth IRA if he is the sole beneficiary or if separate accounting has been applied timely.
The spouse beneficiary has the option to distribute and roll over the inherited assets to her own IRA, even if separate accounting is not established. This is a reportable transaction.
Roth IRA Trust Beneficiary Options
For beneficiary purposes, there are generally two main types of trusts: see-through and nonsee-through. To be considered a see-through trust, the trust must be valid under state law; be irrevocable, or become irrevocable upon the IRA owner’s death; and have identifiable beneficiaries listed.
NOTE: Financial organizations are no longer required to receive a copy of the trust instrument but may rely instead on the trustee’s direction
The final RMD regulations allow a see-through trust to look through to the oldest eligible designated beneficiary in order to calculate life expectancy payments. Note that life expectancy payments are only available if all beneficiaries of the named see-through trust are eligible designated beneficiaries. Otherwise, the 10-year rule will apply. To better understand the difference between see-through and nonsee-through trusts, and the options available to trust beneficiaries, see Trust Beneficiary Basics and Naming a Trust as IRA Beneficiary.
