Inherited Roth IRA

[Guest Cleveland Matt]

Like a lot of folks, I am thinking about converting a traditional IRA to a Roth IRA in 2010. Given my age, my wife's age and children's ages - I am assuming that first, my wife will inherit the Roth IRA, and second she will pass it down to our children. Given my personal situation I am using this Roth IRA as my major legacy to the children. Now my kids will likely be in their 30s or 40s when this happens. So my questions are:

Can my children upon the inheritance of a Roth IRA elect to take all of the money at once, or do they get to spread over their life expectancies, or is there some other method?

Do they need to pay income tax on the distributions (like a 10% penalty) if they are under age 59.5 (given the methods of distribution noted above)?

Is leaving a Roth IRA more advantaged for them than a traditional IRA - in terms of when they can begin to get distributions? (I understand the tax advantages.)

[masteff]

You should familiarize yourself with IRS Publication 590: http://www.irs.gov/pub/irs-pdf/p590.pdf

See the section entitled "IRA Beneficiaries" beginning on page 36, "Distributions After Owner's Death" on page 70, and "Exceptions" on page 67.

Generally speaking, your children would elect to either take the full amount within 5 years or take it based on life expectancy. They would not be subject to the 10% penalty because the distributions would be made to a beneficiary after your death.

It could be useful for your wife and children to understand that, if you do pre-decease your wife, it might be beneficial that she explicitly elect to treat the Roth IRA as her own.

Of course the laws and rules are always subject to change and you may want to consult with a competent professional tax advisor who can help you better understand how these laws and rules apply to your individual circumstances.