By Andy Ives, CFP®, AIF®
IRA Analyst
We have written about this topic in The Slott Report before (“Inherited Roth IRA: RMDs or No?” – May 15, 2023), yet the questions continue to roll in. Yes, required minimum distributions (RMDs). DO APPLY to inherited Roth IRAs. However, recognize that there are a number of variables and some context needed here. Simply stating that “RMDs apply” does not come anywhere near explaining HOW the payout rules work for inherited Roth IRAs.
QUESTION: “Do RMDs apply to inherited Roth IRAs?” That question must be clarified by adding the word “annual.” “Do annual RMDs apply to inherited Roth IRAs?”
ANSWER: It depends on the type of beneficiary.
When a non-eligible designated beneficiary (NEDB) inherits a Roth IRA, the 10-year rule applies. There are NO annual RMDs during this 10-year period. The only stipulation is that the entire account must be emptied by the end of year 10. Technically, this final payment is considered an RMD. This is the necessary clarification and context. When people hear “RMD,” most think “annual distribution.” Such is not always the case.
Bottom Line: When an inherited Roth IRA is subject to the 10-year rule, there are no annual RMDs, but the full distribution at the end of year 10 is considered an RMD. (After all, it is required that the account be emptied.)
On the other hand, when an eligible designated beneficiary (EDB) inherits a Roth IRA, that EDB has a choice. He can elect the 10-year rule with no annual RMDs, or he could elect the full lifetime stretch, i.e., annual RMDs over his single life expectancy. (The EDB category includes surviving spouses; minor children of the account owner until age 21; disabled and chronically ill individuals; and individuals not more than 10 years younger than the IRA owner.)
Not counting surviving spouses who have their own set of rules, if a non-spouse EDB chooses the full lifetime stretch, he uses his age in the year after the year of death to determine his initial RMD factor from the Single Life Expectancy Table. The factor is then divided into the prior year-end balance to determine the RMD. The initial factor is then reduced by 1.0 each year. This is the same way RMDs on inherited IRAs have been calculated for years.
Bottom Line: When an inherited Roth IRA is subject to the full lifetime stretch (based on the EDB status of the beneficiary), there ARE annual RMDs, and the payout structure follows the standard beneficiary RMD calculation that applies to inherited traditional IRAs.
Is this confusing? Of course! Does it stink that we have to consider all these permutations and types of beneficiaries? Absolutely. But this is the nutty world we live in. Just understand that there is context to the question, “Do RMDs apply to inherited Roth IRAs?”
If you have technical questions you would like to have answered, be sure to submit them to [email protected], to be answered on an upcoming Slott Report Mailbag, published every Thursday.