Question and background:
My mother passed away (before retirement age) and left a small amount of money in her Roth IRA. I understand I can either withdraw a lump sum or roll it over into an IRA of my own, then take mandatory distributions. It seems like either way I don't pay an early withdrawal penalty, so I might as well take the cash now (it wouldn't bump me into a higher tax bracket). Is this decision a no-brainer or is there something I'm missing?
I'm very sorry about the loss of your mother.
If you take a full distribution of the Roth IRA now, what you'll potentially be missing is the opportunity for continued tax-free growth by stretching the required distributions over your own life. Here's some further context....
Assuming you are a "designated beneficiary" of your mother's Roth IRA (meaning that she specifically listed you on the beneficiary designation form), you have two options:
- Distribute the entire account by December 31 of the fifth year after your mother's death. You can distribute all of it now, any amount year-by-year, all of it in year five, etc.
- Take Required Minimum Distributions (RMDs) over your own life expectancy per IRS tables. These must start by December 31 of the year following your mother's death.
You cannot roll your mother's Roth IRA into one of your own. Only spouses have that opportunity. But as a designated beneficiary, you'd transfer her Roth IRA directly to an "Inherited Roth IRA" for your benefit. There are important titling and set-up procedures to observe.
As a designated beneficiary, if you are under age 59 1/2 you won't be subject to the 10% federal penalty tax on earnings in your mother's Roth IRA. But you would have to pay income tax on any distributed earnings if her Roth IRA has not yet existed for five tax years.
If you are not the only designated beneficiary and you wish to stretch distributions, you'll want to have your portion separated and transferred to the Inherited Roth IRA. There can be additional complexities when multiple beneficiaries are taking distributions from the same retirement account.
Hope that helps. Best wishes with your decision.