The rules governing distributions from inherited retirement accounts have become much more complex in the wake of the Secure Act and its successor, Secure 2.0 Act. Much of the focus has been on the new 10-year payout rule as it applies to inherited IRAs and 401(k)s.
Inherited Roth accounts, with their own set of rules, have also been affected by the Secure Acts. Many clients are surprised to learn that Roth accounts are subject to required minimum distribution requirements after the death of the original account owner.
Identifying the correct RMD obligations will depend on the individual client's status and, perhaps, the elections made by a prior beneficiary. Understanding the rules is essential to avoiding tax penalties down the line.
Roth IRA RMDs: The Basics
Most retirement account beneficiaries are subject to 10-year distribution requirements. A non-eligible designated beneficiary inheriting an account is required to take RMDs over a 10-year period and becomes subject to annual distribution requirements only if the original account owner had begun taking required distributions before their death.
This 10-year payout rule also governs inherited Roth accounts. But because Roth IRAs are not subject to lifetime RMDs, the owner cannot have been required to take distributions during life. As such, a non-designated beneficiary who inherits the account is required to empty it only by the end of the 10th year. Annual RMDs are not required.
Eligible designated beneficiaries, generally including the account owner's spouse, minor child or someone who is disabled or chronically ill, are subject to different rules. They can abide by the 10-year distribution rule or elect to stretch the required distributions over their life expectancy.
If they use the life expectancy rule, they'll calculate their lifetime annual RMDs by using their life expectancy factor from the Internal Revenue Service's Single Life Expectancy table and the account balance at the end of the previous year.
Successor Beneficiaries and Inherited Roth RMDs
Successor beneficiaries — the beneficiary of an inherited account's original beneficiary — of inherited Roth IRAs should also be considered when determining how RMDs would apply.
Typically, a beneficiary's status as an eligible or non-eligible designated beneficiary depends on the beneficiary's status or relationship to the account owner. This is not relevant when determining the RMD obligations for successor beneficiaries, who are subject to the same RMD obligations as the original beneficiary.
A successor beneficiary who inherits an account that has been subject to the 10-year payout rule is not given a new payout window. The account still must be emptied within 10 years of the original account owner's death.
When the original beneficiary was an eligible designated beneficiary who elected to use the life expectancy rule, any successor beneficiary continues with RMDs using the original beneficiary's life expectancy factor. However, the 10-year rule applies. The successor beneficiary must take annual distributions during the first nine years of the 10-year period and empty the account by the end of year 10.
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