Inherited Roth RMD Obligations Post-SECURE
The rules governing distributions from inherited retirement accounts have become exponentially more complex in the wake of the SECURE Act and the successor SECURE Act 2.0. Much of the focus has been on the new ten-year payout rule as it applies to inherited IRAs and 401(k)s. Inherited Roth accounts are subject to their own set of rules—and yes, these Roth accounts have been impacted by the SECURE Acts. Many clients are surprised to learn that Roth accounts are, in fact, subject to minimum distribution requirements, or RMDs, after the death of the original account owner. The nature of those RMDs, however, will depend on the identity of the Roth account beneficiary—and the rules can be extremely confusing for many clients.
Roth IRA RMDs: The Basics
Post-SECURE Act, most retirement account beneficiaries are subject to a ten-year distribution requirements. When a non-eligible designated beneficiary inherits an account, they are required to take RMDs over a ten-year period. They become subject to annual distribution requirements only if the original account owner had already begun taking required distributions prior to their death.
This ten-year payout rule also governs inherited Roth accounts. However, because Roth IRAs are not subject to lifetime RMDs, the owner cannot have been required to take distributions during life. That means the non-designated beneficiary who inherits the account is only required to empty the account by the end of year ten—they are not required to take annual RMDs, and are free to take the entire RMD in year ten if they choose.
Eligible designated beneficiaries are subject to a different set of rules. Eligible designated beneficiaries generally include the account owner’s spouse, minor child or someone who is disabled or chronically ill.
An eligible designated beneficiary can elect to abide by the ten-year distribution rule or they can elect to stretch the required distributions over their life expectancy. If they elect to use the life expectancy rule, they’ll calculate their lifetime annual RMDs by using their life expectancy factor from the IRS’ Single Life Expectancy table and the account balance at the end of the previous year.
Successor Beneficiaries and Inherited Roth RMDs
Successor beneficiaries of inherited Roth IRAs should also be considered when determining whether—and how—RMDs will apply. A successor beneficiary is the beneficiary of an inherited account’s original beneficiary.
Typically, the beneficiary’s status as an eligible or non-eligible designated beneficiary depends on the beneficiary’s status or their relationship to the account owner. This is not relevant when determining the RMD obligations for successor beneficiaries. Successor beneficiaries are subject to the same RMD obligations as the original beneficiary.
When a successor beneficiary inherits an account that has been subject to the ten-year payout rule, the successor is not given a new ten-year payout window. They must empty the account within the original ten-year window (i.e., within ten 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 their RMDs using the original beneficiary’s life expectancy factor. However, the ten-year rule then applies. The successor beneficiary must take annual distributions during the first nine years of the ten-year period and empty the account by the end of year ten.
Conclusion
The rules governing RMDs from inherited retirement accounts have become incredibly complex. 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 critical to getting it right and avoiding tax penalties down the line. Your questions and comments are always welcome. Please post them at our blog, AdvisorFYI, or call the Panel of Experts.