By Andy Ives, CFP®, AIF®
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QUESTION: Do required minimum distributions (RMDs) apply to inherited Roth IRAs?
ANSWER: It depends on who the beneficiary is.
Owners of traditional IRAs must start taking RMDs when they reach their required beginning date (RBD). That date is generally April 1 of the year after a person turns 73 (or 72 prior to SECURE 2.0, or 70 ½ prior to the original SECURE Act). However, owners of Roth IRAs are never required to take lifetime RMDs from their Roth IRA. Since lifetime RMDs are not applicable to Roth IRAs, all Roth IRA owners are deemed to have died before the RBD. Even if a Roth IRA owner died at age 100, he would be deemed to have died before his RBD.
Example 1: Jim is 75 years old. He has a Roth IRA. During his lifetime, Jim does not need to take RMDs from this account. Even if Jim lives for another three decades, his Roth IRA can remain totally untouched and will grow tax-free.
Now layer on the different beneficiary payout rules. As dictated by the SECURE Act, non-eligible designated beneficiaries (NEDBs) must abide by the 10-year payout rule. The entire inherited IRA account must be depleted by the end of the tenth year after the year of death. Additionally, if the original IRA owner died on or after his RBD (meaning he was taking lifetime RMDs), then RMDs would also apply to the beneficiary in years 1 – 9 of the 10-year rule. However, if the original IRA owner died before the RBD, the NEDB would not be required to take RMDs within the 10-year payout period.
As mentioned above, Roth IRA owners are always deemed to have died before the RBD, regardless of age, because Roth IRAs have no lifetime RMDs. As such, RMDs do not apply to the 10-year payout rule when a Roth IRA is inherited by an NEDB. This allows the inherited Roth IRA to continue to accumulate tax-free for the full 10-year term before the account must be emptied.
Confusion centers around the rules when an eligible designated beneficiary (EDB) inherits a Roth IRA. EDBs are permitted to use their own single life expectancy to leverage the full lifetime stretch on an inherited IRA. While there are no RMDs on an inherited Roth IRA within the 10-year period, there are RMDs on an inherited Roth IRA if an EDB elects the lifetime stretch. After all, the inherited Roth IRA cannot remain untouched in perpetuity. While an EDB can avoid the 10-year rule and stretch an inherited Roth IRA over his own single life expectancy, the tradeoff is that RMDs (even if non-taxable) must be taken annually by the EDB, starting in the year after the year of death.
Example 2: Jim from the example above dies at age 77. He named his brother Jack, age 69, and his granddaughter Lucy, age 40, as his 50/50 Roth IRA beneficiaries. Jack qualifies as an EDB because he is not more than 10 years younger than Jim. EDB Jack elects the lifetime stretch on his portion of the inherited Roth IRA and takes annual RMDs over the next 19 years. Lucy is an NEDB and is bound by the 10-year rule. NEDB Lucy has no RMDs in years 1 – 9, but must empty the inherited Roth IRA by the end of year 10.