Even after death, your Roth IRA can bill itself as the gift that keeps on giving. While traditional IRA deposits are tax-deductible, distributions of any and every type and timing are taxable as income. The Roth IRA saves you no dough going in but, but when you withdraw money at retirement age, the tax man has conveniently left the building -- as long as the account has been open for five years. Roth beneficiaries can likewise escape taxes and penalties if the account they inherit meets the five-year rule.
Roth IRA beneficiaries are spared the pain of taxes as long as the Roth has been open for five years. If it has not, any earnings distributed before the five-year mark are taxable. For example, if the original account owner established the Roth in 2010 and dies in 2013, any earnings distributed before Jan. 1, 2015 would be taxable as income. A withdrawal from a traditional IRA before age 59 1/2 is considered an early distribution and may incur a 10 percent penalty. At age 70 1/2, the IRS requires that you stop making contributions and start taking minimum distributions. No matter when you take a traditional IRA distribution and no matter what the reason, you report it as income when you file your tax return. Even when you make a withdrawal that meets the early distribution exceptions -- such as to buy a new home or pay for college -- you still have to pay tax on the amount. Your beneficiaries must pay income tax on their distributions.
Non-spouse beneficiaries of traditional or Roth IRAs must start taking distributions by Dec. 31 of the year after the original account owner's death. They can withdraw all of the assets at once, within five years of the death or in yearly payouts based on their own life expectancy. The life-expectancy option, also known as "IRA stretching," allows the account assets to continue growing for the longest period. For a Roth beneficiary, this can add up to more tax-free income. Because a traditional IRA owner had to stop funding the account at 70 1/2 and start taking money out, traditional IRA account growth potential is much lower than that of a Roth.
The spouse beneficiary of a Roth or traditional IRA is the only beneficiary who can elect to assume the inherited assets as her own. She can roll the inherited funds into her own Roth account and allow them to continue to grow throughout her lifetime and beyond. The Roth IRA spouse beneficiary can name her own beneficiaries in turn. By the time she passes away, her designated beneficiaries may have the benefit of 40 or more years of continuing contributions and tax-free growth.
A Roth account holder can continue putting money in the account for as long as he lives and never has to take a distribution. A Roth IRA that is opened the same day and has an identical contribution history and interest rate as a traditional IRA, has the potential to net more to the heir. This is because contributions continue after age 70 1/2 and because taxation is nil if the five-year rule is met.
D. Laverne O'Neal, an Ivy League graduate, published her first article in 1997. A former theater, dance and music critic for such publications as the "Oakland Tribune" and Gannett Newspapers, she started her Web-writing career during the dot-com heyday. O'Neal also translates and edits French and Spanish. Her strongest interests are the performing arts, design, food, health, personal finance and personal growth.