At some point, all individual retirement accounts (IRAs), both Roth and traditional, must have their balances distributed to their account owners. The key difference between the two types of IRAs, is that you don’t need to take any distributions from a Roth IRA during your lifetime.
- You must take required minimum distributions (RMDs) from a traditional IRA starting at age 70½.
- Unlike traditional IRAs, there are no RMDs for Roth IRAs during the account owner’s lifetime.
- Your account’s beneficiaries may need to take RMDs to avoid penalties.
RMD Rules for Roth IRAs
Required minimum distributions (RMDs) represent the minimum amount of money that you must take out of your retirement account each year. That amount is specified by the Internal Revenue Service (IRS) and, in the case of traditional IRAs, the amount of the withdrawal is taxed as income at your current tax rate. The IRS also imposes a 50% penalty on any missed RMDs.
You must begin taking RMDs from a traditional IRA by April 1 of the year after you turn 70½. That is true even if you don’t need the money for living expenses. The amount of your RMD is based on both your prior year’s account balance (as of Dec. 31) and an IRS table based on your age. Many other types of retirement accounts, including 401(k) plans, follow a similar set of rules. Almost always, you must pay income taxes on those withdrawals. Even if you don’t, you no longer get tax-free growth on that money.
One of the great advantages of Roth IRAs is that they are not subject to the same RMD rules. If you have a Roth IRA, you don’t need to take RMDs during your lifetime. So if you don’t need the money, you can leave the funds untouched and let the account grow tax-free (for decades) for your heirs. Your beneficiaries—other than a surviving spouse—must take RMDs later, however.
What Are the RMDs For Roth Beneficiaries?
When you leave a Roth IRA to your beneficiaries, they become subject to a new set of RMD rules. They will also face a 50% penalty (or “excise tax”) if they don’t take the distributions as required, so it pays to understand the rules—and make sure your beneficiaries do, as well.
The rules differ depending on whether the Roth is inherited by a spouse or by someone else.
Options For Spouses
- Do a spousal transfer (treat as your own). You transfer the assets into your own Roth IRA (an existing one or a new one). You’re subject to the same distribution rules as if you were the original account holder.
- Open an inherited IRA: life expectancy method. Here, you transfer the assets into an inherited IRA in your name. You must take RMDs, stretched over your life expectancy. But you can postpone distributions until your spouse would have reached age 70½, or Dec. 31 of the year after he or she spouse passed away. Distributions aren’t taxed if the 5-year rule on inherited IRAs has been met.
- Open an inherited IRA: 5-year method. You transfer the assets into an inherited IRA in your name. You can spread your distributions over time, but the account must be fully distributed by Dec. 31 of the fifth year after your spouse passed away. Distributions are not taxed if the five-year rule has been met.
- Take a lump-sum distribution. When you take the lump-sum option, the Roth IRA assets are distributed to you all at once. If the account was less than five years old when your spouse passed away, the earnings will be taxable.
Options For Other Beneficiaries
Someone who inherits a Roth IRA from a friend or non-spouse family member has these options:
- Open an inherited IRA: life expectancy method. You transfer the assets into an inherited IRA in your name. You have to start taking RMDs by Dec. 31 of the year following the previous account holder’s death. Distributions are stretched over your life expectancy and are not taxed if the five-year rule has been met.
- Open an inherited IRA: 5-year method. You transfer the assets into an inherited IRA in your name. You can spread your distributions over time, but the account must be fully distributed by Dec. 31 of the fifth year following the previous account holder’s death. Distributions are not taxed if the five-year rule has been met.
- Take a lump-sum distribution. The Roth IRA assets are distributed to you all at once. If the account was less than five years old when the account holder died, the earnings will be taxable.
If you plan to leave a Roth IRA to your heirs, make sure they know the rules on required minimum distributions.
Tax-Free Growth, Tax-Free Income: Pass It On
A Roth IRA can be an excellent wealth-transfer vehicle because you don’t have to draw down the account during your lifetime, and distributions are generally tax-free for your heirs.
One challenge with Roth IRAs is that your beneficiaries may not be aware of the RMD rules. So if you have a Roth IRA, do your beneficiaries a favor. Let them know the basics about distributions—or they’ll get a costly lesson later, when they’re hit with a 50% penalty on the amounts they should have withdrawn. As long as everyone understands the rules, you and your heirs can enjoy years of tax-free growth and tax-free income from your Roth IRA.