Am I correct to assume if I leave my Roth IRA to my 2 adult children, they will have to take all the money out by the end of year 10 and they will have NO taxes to pay on it because it is a Roth? They can take some out each year with NO taxes due, but have the option to leave it all in the account for 10 years, if they desire.
Assuming you have had the Roth IRA for 5 years, then you are correct – your children will inherit the entire account and it will be available immediately tax-free. However, they cannot leave the Roth IRA untouched forever. They can take as much or as little as they want each year, but they will have to empty their inherited Roth IRA accounts by the end of the 10th year after your death.
I had a couple of questions I was hoping you could clarify regarding Roth conversions. I have a 68-year-old client who is considering annual Roth conversions in order to reduce future liability for his wife (17 years younger than him) and for his children beyond that. Since he is older than 59 ½, does the 5-year rule still apply? Does it also apply to his heirs? Thanks!
Your 68-year-old client will have immediate access to his converted dollars. If he has had any Roth IRA for 5 years or more, he will also have immediate access to the earnings within those converted accounts tax-free. If he has not had any Roth IRA for 5 years, or if his first conversion is his first entry into a Roth IRA, he will have to wait 5 years for the earnings to be available tax-free. However, once he hits the 5-year mark for any Roth IRA, all clocks go away and every Roth IRA dollar is immediately available tax-free, even if he does conversions later in life. Additionally, once he hits the 5-year mark on any Roth IRA, his heirs will also have access to the entire inherited Roth IRA tax-free.