How to Use a Roth IRA to Avoid Paying Estate Taxes

Smart estate planning will minimize the tax bill that your heirs pay when you die, and a Roth individual retirement account (Roth IRA) is one of the most effective tools for that purpose. Aside from all the other positive characteristics of Roth IRAs, there are two reasons for including one in your estate planning:

Key Takeaways

  • You don’t have to take annual distributions from a Roth individual retirement account (Roth IRA) during your lifetime, so you can leave it all to your heirs if you don’t need the money.
  • In most cases, heirs can make tax-free withdrawals from a Roth IRA over 10 years.
  • Spouses who inherit Roth IRAs can treat the accounts as their own. That is, there are no deadlines for withdrawals.

You Can Leave the Whole Roth IRA to Your Heirs

One of the major advantages of a Roth IRA, unlike traditional IRAs and many other types of retirement plans, is that you don’t have to take any required minimum distributions (RMDs) during your lifetime. Because you already paid the income taxes due on that money, the Internal Revenue Service (IRS) doesn’t care when you use it.

If you don’t need the money for living expenses, you can just leave it in the account to keep growing tax free. This makes a Roth IRA an especially good vehicle for wealth transfer. The entire funds deposited into the account, plus earnings, can transfer to your beneficiaries.

You don’t even need to identify a beneficiary in your will because the beneficiary designated on your Roth IRA contract is sufficient to transfer outside of probate. In fact, the named beneficiaries on your Roth take precedence over anything stipulated by your will.

How Your Heirs Can Avoid Taxes

Spouse Beneficiary

A spouse who inherits can choose to become the account holder of the Roth IRA without any changes; this is called a spousal transfer. That is, no taxes should be owed on withdrawals from the account, and no minimum distributions are required.

Alternatively, the spouse can transfer the assets into an inherited Roth IRA in their name and opt to spread distributions over either their life expectancy or five years. In all cases, the money remains tax free.

Non-Spouse Beneficiary

It used to be that non-spousal beneficiaries could stretch distributions over their own life expectancy as well. However, as of Jan. 1, 2020, adult children and other heirs cannot treat the IRA as their own.

Instead, most must withdraw all of the money in the Roth account within 10 calendar years of the date when it was inherited. There are no set RMDs in any single year, but the full account balance must be paid out by the end of the 10 years. If the account existed at least five years prior to the account owner’s death, the distributed money will be tax free.

Some non-spousal heirs are exempt: those whose age is within a decade of the deceased’s, disabled or chronically ill individuals, or minor children. However, these minors must be the direct biological children, stepchildren, or adopted children of the account owner only (no grandchildren, in other words), and—when they reach majority age—the 10-year rule kicks in for them, too.

Be sure to keep the beneficiary designations on your Roth IRA and other financial accounts up to date, so the money will go where you want it to without delay.

Roth IRAs Help You Avoid Probate

Like proceeds from a traditional retirement account or a life insurance policy, the money that you leave your heirs in a Roth IRA doesn’t have to go through the probate process. This simplifies and speeds up the disbursement of funds to your loved ones and can reduce the cost of settling your estate.

Don’t name your estate as a beneficiary, or you’ll lose the opportunity to bypass probate—the account would be distributed to your estate first, then passed to your heirs according to your will.

Mutual fund companies, banks, brokerage firms, and other financial institutions that serve as custodians for Roth IRAs will typically require you to designate a beneficiary—and sometimes alternate beneficiaries—when you open your account.

Do Roth individual retirement accounts (Roth IRAs) have required minimum distributions (RMDs)?

No. Unlike traditional individual retirement accounts (traditional IRAs), there are no required minimum distributions (RMDs) for Roth IRAs during the account owner’s lifetime. If the account owner doesn’t need the money, they can leave it in the account to continue growing tax free for their heirs.

What happens if I don’t designate a Roth IRA beneficiary?

If you do not have a properly designated beneficiary upon your death, then the proceeds from your Roth IRA will go through your estate and the probate process. Your spouse or children eventually may end up with the Roth, but they won’t have access to the same tax benefits as if you had property designated them as beneficiaries.

Do beneficiaries pay taxes on withdrawals from an inherited Roth IRA?

Typically, no. A beneficiary does not have to pay taxes on withdrawals from an inherited Roth IRA as long as the account owner opened—and began making contributions to—the account more than five years before their death.

The Bottom Line

It’s essential to designate a Roth IRA beneficiary to ensure that your wishes are carried out after you die. It’s equally important to periodically review your beneficiary designations (for all of your accounts) to make sure that they are up to date—especially after major life events, such as marriage, divorce, the birth of a child, or the death of a previous beneficiary. For example, your current spouse might not appreciate seeing your Roth IRA go to a former spouse because you forgot to update the form.

Article Sources
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  2. Fidelity. “Retirement Accounts.”

  3. Internal Revenue Service. “5.5.2 Probate Proceedings.”

  4. Internal Revenue Service. "Retirement Topics - Beneficiary."

  5. Fidelity. "SECURE Act Rewrites the Rules on Stretch IRAs."

  6. U.S. Congress. “H.R.1994 — Setting Every Community Up for Retirement Enhancement Act of 2019.”

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  8. Internal Revenue Service. “Publication 590-B (2021), Distributions from Individual Retirement Arrangements (IRAs).” Page 36.

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  11. Internal Revenue Service. “5.5.2 Probate Proceedings.”

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