Inheriting a Roth IRA is a great thing because all the distributions that you take will be tax free. And, if you are lucky enough to inherit a Roth IRA when you are young, you could have decades and decades of tax free withdrawals ahead of you. You may even find that the total of all the distributions you take over your lifetime exceed the initial value of the account many times over. That is why it is important to try to take only the required minimum distributions (RMDs) from an inherited IRA if at all possible.
However, if you must take distributions faster than the schedule required for RMDs, you need to be aware of the 5 year rule. Beneficiaries can withdraw the earnings portion of a Roth IRA tax free, but only if the account has been opened for at least 5 years. So, if the person who left you the Roth IRA opened the Roth recently and died soon after, you may have to wait a few years to avoid taxation.
Here is an example: if you inherit a Roth that was opened on May 1, 2007, the account was considered to be opened as of January 1, 2007. To avoid paying taxes on the earnings portion of the Roth once you inherit it, you must not take out the earnings until after January 1, 2012.
This doesn't mean that you cant take any withdrawals before that date -- you are always free to withdraw the contributions to a Roth tax free. It is only the earnings portion that has a waiting period and the other nice thing about Roths is that any withdrawal you do take is assumed to come from the contributions first. Earnings are assumed to be withdrawn last.
If you inherit the Roth IRA from your spouse, you can elect to treat the account as if it were your own. If you elect to treat it as your own, however, you may not be able to withdraw earnings free of tax until you reach age 59 and a half.
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