Roth IRAs and Required Minimum Distribution (RMD) Rules Explained

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

Updated on Friday, February 15, 2019

retirement planning written on a notepad
iStock

One of the biggest benefits of the Roth IRA is there are no required minimum distributions (RMDs). With traditional IRAs, account holders are required to begin taking RMDs when they reach 70 and a half.

Roth IRAs, however, are funded with money that has already been taxed, which means there is no RMD for the primary account holder. Although the primary account holder is free from RMDs, there are still additional rules governing the withdrawal of funds from Roth IRAs.

Here’s what you need to know about the distribution rules for Roth IRAs.

Do Roth IRAs have RMDs?

Roth IRAs do not require account holders to take required minimum distributions at any time, but there are various rules governing your ability to withdraw funds from a Roth IRA.

To start, there are both age and timing limitations for when an account holder can take distributions from a Roth IRA without penalties. Specifically, account holders must have reached the age of 59 and half, and have had their Roth IRA open for a minimum of five years prior to their first withdrawal in order for that distribution to be exempt from penalties. For instance, if you open a Roth IRA at the age of 57, you’ll have to wait until you are 62 years old to make a penalty-free distribution, known as the five-year rule.

Additionally, while account holders are not subject to RMDs, anyone who inherits a Roth IRA from the primary account holder must follow specific rules about distributions — or face a painful tax penalty.

financial advisor

Inherited Roth IRAs and required minimum distributions

The IRS has rules for spousal and non-spousal heirs of Roth IRAs, and the specific rules depend on whether the account holder had opened the account at least five years before his or her death.

Inheriting a Roth IRA from your spouse

A surviving spouse is allowed to take over the deceased spouse’s Roth IRA as the account holder. Doing this ensures there will be no RMDs for the surviving spouse’s lifetime. The Roth IRA will simply be an account that the surviving spouse may access if he or she chooses.

A surviving spouse may also take distributions from their Roth IRA, although the rules change depending on whether or not the Roth IRA meets the five-year rule.

Roth IRA inheritance meets the 5-year rule

Let’s say Arthur passed away 20 years after opening his Roth IRA and named his wife, Arabella, as his beneficiary. Arabella will not face RMDs and will have a few options once she takes over the account.

One option is to take distributions spread out over her lifetime. To do this, Arabella will use the IRS Table I: Single Life Expectancy Table. To determine her annual distribution amount, she will divide the Roth IRA balance by the distribution period listed on Table I for her current age. For instance, if Arabella is 76, her life expectancy is 12.7 years, and she will divide the account balance by 12.7 to calculate this year’s distribution amount.

Alternatively, Arabella could also take distributions based upon Arthur’s age. In this case, she would use Arthur’s age in the year he died and compare it to Table I. So if Arthur turned 74 the year he died, his life expectancy was 14.1 years. She will then divide the Roth IRA balance by 14.1 and use that as her first-year distribution amount. The following year, she will take a distribution as if Arthur were 75, and continue to increase his “age” for each subsequent year.

Roth IRA inheritance does not meet the 5-year rule

What if Arthur died less than five years after opening his Roth IRA? Arabella will still have three options, but they are slightly different:

First, Arabella would still have the option of treating the Roth IRA as her own. She may also take distributions based upon Arthur’s age, but she would not be able to take distributions based upon her own age. One additional option available is to withdraw the entire balance by the end of the fifth year following Arthur’s death.

Spousal options for inherited Roth IRAs

Account holder met five-year ruleAccount holder did not meet five-year rule
Spouse treats Roth IRA as his or her ownSpouse treats Roth IRA as his or her own
Spouse takes distributions over his or her lifetime, based upon current ageSpouse takes distributions based upon deceased spouse’s age
Spouse takes distributions based upon deceased spouse’s ageSpouse withdraws entire balance by end of fifth year following the year of death

Non-spousal inheritance of Roth IRA

If you are the beneficiary of a Roth IRA from a parent, sibling, or other individual who is not your spouse, your options are a little more limited. The IRS does not allow non-spouse heirs to treat an inherited Roth IRA as their own, so you will face some sort of required minimum distribution.

Again, the options are different depending on whether the Roth IRA meets or does not meet the five-year rule:

Roth IRA meets the 5-year rule

Let’s say Phillip passed away at the age of 80, leaving his Roth IRA to his 50-year-old son Colin, and his 47-year-old daughter Margaret. Phillip died after holding the Roth IRA for more than five years.

The only option available to Colin and Margaret is to take life expectancy distributions. They can determine those distributions based upon the youngest of the two options: their own ages at the end of the year following Phillip’s death, or Phillip’s age as of his birthday in the year that he died.

Obviously, Colin and Margaret are younger than their father and must take distributions based upon their own ages. However, if there are multiple beneficiaries, the IRS requires them to take distributions based upon the age of the oldest beneficiary. That means Colin and Margaret must take annual distributions based on Colin’s age.

Roth IRA does not meet the 5-year rule

If a Roth IRA account holder passes away before holding the account for five years, that changes the options available for a non-spousal heir. For instance, let’s say Emma opened a Roth IRA three years before she passed away, and named her brother, Bromley, as the beneficiary.

Like Colin and Margaret, Bromley has the option of taking life expectancy distributions. However, because Emma’s Roth IRA does not meet the five-year rule, he must base his distributions on his own age, rather than the younger of his or Emma’s age.

Bromley also has the option of taking the entire balance of the Roth IRA as a distribution by the end of the fifth year after Emma’s death.

Non-spousal options for inherited Roth IRAs

Account holder met five-year ruleAccount holder did not meet five-year rule
Beneficiary takes distributions over his or her lifetime, based upon current age or account holder’s age at death, whichever is younger. Multiple beneficiaries must take distributions based upon the oldest beneficiary’s ageBeneficiary takes distributions over his or her lifetime, based upon current age
Beneficiary withdraws entire balance by the end of 5th year following year of account holder’s death.

Pitfalls to Roth IRA inheritance

There are a few potential issues that Roth IRA beneficiaries must be aware of so they can avoid a painful tax penalty.

The first is the penalty facing any beneficiary who takes less than the RMD. If you take less than the amount equal to the Roth IRA balance divided by your life expectancy, then you will owe the IRS 50% of the amount that should have been withdrawn.

Another issue facing Roth IRA heirs is what happens if the account does not meet the five-year rule. Until you reach the fifth year from when the Roth IRA was opened, any distributions you take will be subject to regular income tax. That’s because you, as beneficiary, are being treated as if you are the account owner who is taking distributions prior to the end of the five-year period. However, you are not subject to the 10% penalty Roth IRA account holders face when they take distributions before five years have passed.

You can easily avoid this tax burden by waiting to take distributions until the Roth IRA meets the five-year rule.

Bottom line

Although Roth IRAs have no RMDs for primary account holders, beneficiaries should take their time in understanding the rules governing inherited Roth IRAs. That way they can make the best financial decision with their inheritance and stay on the IRS’s good side.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Do you have a question?