Succession Planning for Roth IRAs: Considerations for Spouses and Children

Retirement accounts, like the Roth IRA, have the potential to form a major part of your overall wealth. Thoughtful IRA succession planning—especially for spouses and children—helps maximize tax advantages, preserve growth potential, and avoid unintended forced distributions or tax hits under current law. Below we will explore some important considerations, especially for those holding an active alternative investment like rental real estate.

When a surviving spouse inherits a Roth IRA from a deceased spouse, the Internal Revenue Code—primarily through IRC § 408A and the rollover provisions in § 408(d)(3)—gives the spouse more flexibility than other beneficiaries. This reflects the long-standing policy of treating spouses as extensions of the original owner for retirement-planning purposes. Distributions from a properly aged Roth IRA remain tax-free, assuming the five-year holding period under § 408A(d)(2)(B) has been met.

The surviving spouse has four main options:

1. Treat the Roth IRA as their own.
   They can redesignate the account in their own name or roll the assets into an existing Roth IRA they owns. Once done, the inherited status disappears: no required minimum distributions (RMDs) apply during their lifetime (consistent with the Roth rules), they can make new contributions if eligible, and they name fresh beneficiaries.

2. Take life expectancy distributions as an inherited account.
   They keep the account titled as inherited and stretches distributions over their single life expectancy (using the IRS Single Life Expectancy Table), beginning no later than the year after the spouse’s death (or when the decedent would have reached the applicable age under current law).

3. Follow the 10-year rule as an inherited account.
   They retain inherited status but must fully distribute the account by December 31 of the tenth year following the year of death. No annual RMDs are required during those ten years—a benefit unique to inherited Roth IRAs.

4. Withdraw the entire balance as a lump sum.
   They can cash out everything at once. If the five-year rule is satisfied, the distribution is tax-free, though this ends any further tax-sheltered growth.

However, it may be the case that the ultimate goal for the investments in the retirement account to go to children, as the surviving spouse may have other income opportunities to support their retirement. When this is the long-term goal, the two most effective strategies are the lump-sum withdrawal and treating the account as her own. Each has distinct advantages and trade-offs under current law (post-SECURE Act and SECURE 2.0).

1. Complete lump-sum withdrawal.
   By taking the full amount tax-free now, the surviving spouse removes the assets from the IRA framework entirely. The money can then be invested in taxable accounts, real estate, or other vehicles. When they later pass away, the children inherit those assets under general estate rules—typically receiving a step-up in basis under IRC § 1014 for appreciated property. This frees the children from the inherited IRA regime altogether: no 10-year distribution requirement, no successor beneficiary complications, and no forced payouts on a fixed schedule. The downside is obvious—the assets lose the Roth’s tax-free compounding shield, and future gains or income become taxable.

2. Treat the inherited Roth IRA as their own.
   This preserves the account’s tax-advantaged status throughout the surviving spouse’s life. No lifetime RMDs apply, allowing maximum tax-free growth, and they can name the children as designated beneficiaries. Upon the surviving spouse’s death, the children become non-spouse beneficiaries and must open inherited Roth IRAs subject to the 10-year rule under § 401(a)(9)(H) (as amended). They have until December 31 of the tenth year after her death to empty the accounts, with no annual RMDs required in the interim. This option keeps the money growing tax-free for longer than an immediate withdrawal would allow, though it does impose the ten-year deadline on the children rather than giving them unrestricted control.

The choice between these two paths depends on several practical factors: the surviving spouse’s expected lifespan, anticipated investment returns inside versus outside the Roth, the children’s financial maturity, and overall estate goals. In many cases, treating the account as her own strikes the best balance between continued tax-free growth and reasonable flexibility for the next generation. Still, individual circumstances vary, so consulting a qualified tax or estate-planning professional is essential to align the decision with the family’s specific needs and the latest IRS guidance.

Have more questions? Contact us.