What Can I Do With an Inherited Roth IRA?

John Hyre


What can I do with an Inherited Roth IRA? – Video

Video Transcript

John Hyre: Inherited Roths. This is the stretch IRA concept. Google stretch IRA, especially stretch Roth. Here’s how a Roth works. If you inherit a Roth, you can take money out of it tax-free immediately. Normally to qualify for tax-free distributions from a Roth, it has to have existed for five years, and you have to be 59 and a half or older. If you inherit a Roth at any age, you could be four, you can take money out tax-free for the rest of your life immediately. In fact, you’re required to. There’s what’s called required minimum distributions. An inherited Roth, unlike a regular Roth, you are forced to withdraw the money. How did they come up with the formula? They take your life expectancy based on actuarial tables, and say, “You got to take out this much per year.”

Let’s think about two planning angles on that. First of all, let’s say you’re considerably under 59 and a half. In other words, it’s going to be a while until you can pull money out of your Roth tax-free. You may not want to, you may want to just keep growing it. You’re considerably under 59 and a half, arrange to inherit a Roth, even if it only has $2,000 in it. What can you do with it? We’ve talked about what you can do with only 2,000 bucks. Arrange to inherit a Roth. Now, there’s a couple of ways to do it. In my family, it’s easy. Well, part of it is. There are really two criteria; do you hate the government? Right, in my family, we got plenty. This is the delicate part, and I think you’re not going to live very long.

That could be a real buzzkill at dinner, but I’ve had clients do it, usually with relatives who are very well-off, very financially savvy, who would engage in this planning. Relatives in their late 80s or 90s. Inherit a Roth. I don’t recommend this. I have seen some people do it. They took it a little far, I thought. They actually trolled the old folks’ homes. They found a reason to pay someone compensation for some consulting. I don’t want to know. Then, they put just 500 bucks in a Roth, and then sat and waited for that person to kick off. They had their $500 seed, little seed, but they could take money from immediately and start growing it. What’s another turnaround on that, how do you pass your assets on?

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Passing a Roth, whoever gets it, should love you, a lot. You pass it to someone very young. You got to coordinate with estate tax issues and generation-skipping tax, but you pass it to someone very young. Why? Because the younger they are, the longer the account lasts, right? If you’re four years old, let’s say your expected life is 90, that’s 90 years tacked on to the existence of that Roth IRA. Where if someone inherits it when they’re 80, then not so much, right? Questions. Given you hopefully have a lot to think about. Guys, I don’t want to do any more rentals outside of these accounts. I’m especially focused on the 401K, I practice what I preach.

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