A useful article from nj.com, “The rules for Inherited Roth IRAs,” explains how the Roth IRA works while owner is living and what happens when the owner dies and the Roth IRA is distributed to heirs.
One of the attractive features of a Roth IRA is that while the original owner is alive, there are no Required Minimum Distributions (RMDs). As a result, the Roth IRA can continue to grow tax-free for a very long time.
However, when the beneficiary dies, the rules change. If a spouse is the beneficiary of an inherited Roth IRA, the spouse can roll over the Roth into the spouse's name and continue to allow the funds to grow tax-free with no RMDs during the inheriting spouse's lifetime.
If the spouse doesn’t rollover the Roth IRA, but rather treats it as an inherited Roth IRA, he or she must make required distributions as soon as the spouse reaches age 70½.
If a child or grandchild is the beneficiary, he or she must withdraw the funds over his or her lifetime.
With a younger beneficiary, such as a grandchild, he or she will enjoy more time before he or she must withdraw the money, increasing the value of the Roth.
Unlike a traditional IRA, a distribution from a Roth IRA doesn’t trigger an income tax.
If the beneficiary is a charity or the owner's estate, or if the owner fails to name a beneficiary, the entire Roth IRA is subject to the five-year rule. That means that the entire Roth IRA must be distributed over the five years, following the death of the owner.
Here’s a fine point that most people aren’t aware of: the funds have to have been in the IRA Roth for at least five years when the owner passes away. If not, the earnings on the funds will be taxable to the beneficiary. On the bright side, there won’t be any penalties for early withdrawal.
Reference: nj.com (February 2, 2018) “The rules for Inherited Roth IRAs.”