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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. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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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.

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.

Emily Guy Birken
Emily Guy Birken |

Emily Guy Birken is a writer at MagnifyMoney. You can email Emily here

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Investing

How to Invest $50,000 Wisely

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

You’ve paid off your debts and built yourself a nice little nest egg of $50,000 — and you may be wondering what you should do with it. Although the phrase “a penny saved is a penny earned” holds truth, you may want to start investing your money.

Investing is an excellent option because of the growth potential of the money you invest. Unfortunately, you run the risk of losing purchasing power if inflation eats away at your savings. Even if you choose to hold your money in a high yield savings account, you may not be able to outpace inflation.

Getting started with investing can be a daunting task for new investors. Let’s take a look at the different types of investment styles and determine the best way to invest $50,000.

Determine your investment style

The first thing you’ll need to do is decide how you want to invest.

Do it yourself

DIY is an option for almost everything in life, although painting your own home and building your investment strategy are two very different tasks. The idea is that you will complete the process without any professional help.

If you choose a DIY investment strategy, it is important to map out your investment strategy with careful research and planning. After you are comfortable with your plan, you will need to open a brokerage account to purchase investments.

The obvious advantage to this tactic is that it’s typically less expensive than many other options. However, you need to be comfortable making large financial moves without any professional assistance.

Robo-advisor

Robo-advisors vary widely based on the brokerage firm. However, the service generally manages your investments based on an algorithm. Although some firms offer lower fees, many offer fee structures that are comparable to traditional financial advisors.

Although you will not receive personalized attention, a robo-advisor is tailored to your investment interests. Plus, many robo-advisors offer lower entry fees than traditional financial advisors. In fact, some robo-advisors, like Betterment, have no minimum balance requirements.

With a robo-advisor, you may need to double check that your strategy aligns with your goals. A physical person won’t be managing your account, so you will need to ensure that the robo-advisor understands your goals and builds your strategy appropriately.

Hire a professional

It may be a good idea to hire a financial advisor if the idea of managing your money without help is scary. A professional will help you to get the most out of your investments with minimal effort on your part.

If you choose this route, make sure you research your future financial advisor carefully, as some don’t have your best interests in mind. Find an advisor with credentials and recommendations that check out.

5 smart ways to invest $50,000

Once you’ve decided how you will start investing, you need to choose your investments. If you chose to work with a professional, they’d be able to guide you with your investing decisions.

There is no single best way to invest $50,000. The best investment strategy for you will vary based on your unique situation. However, investing your money can be a wise choice for your financial future. Let’s take a look at five smart ways to invest 50,000.

1. Create an emergency fund

An emergency fund is a great way to safeguard against the unexpected. Everyone faces unexpected expenses at some point in their life, so it makes sense to be prepared. These unexpected expenses can be anything from losing your job or an unexpected health problem. These heart-stopping moments will be slightly less traumatic if you have a nice emergency cushion.

You’ll also want to consider placing your emergency fund in an account that won’t charge fees for withdrawals. It’s important to have quick access to cash for anything life throws at you

If you have a solid emergency fund, but would like extra savings available, then you may want to consider placing your money in a CD. Although you would not have immediate access to your money without fees, you may be able to plan your CD deposits around large purchases. The CD will help your savings grow while you prepare to make a large purchase (like a home or vehicle).

2. Max out your retirement options

If you ever plan to stop working, then you’ll need to maximize your retirement savings, especially if you have available cash to invest. Luckily, there are numerous options when it comes to retirement savings.

First, if your employer offers a 401(k), you should contribute as much as you are allowed. Other common types of employer-sponsored retirement accounts include 403(b), 457 and the government thrift savings plan. Some employers will contribute matched amounts to your retirement account. You’ll want to maximize this option if it is available.

Unfortunately, not every employer offers a retirement savings plans. Don’t worry; there are other options available.

An IRA (Individual Retirement Account) will allow you to deduct the investments you make from your income. Opening an IRA will allow your funds to grow tax-free until you withdraw them. A Roth IRA is very similar to a traditional IRA. According to Chad Manberg, a CFP at the Strategic Income Group in Arizona, the number one reason to prioritize a Roth IRA over a traditional IRA is “tax-free growth.” However, he added, “Ideally, someone would have both a Traditional and a Roth IRA by the time they get to retirement.”

“The major time to prioritize one over the other is if the 401k is offering a match. In this case, the 401k should be prioritized,” said Rick Vazza CFP at Driven Wealth Management. Other than that period of prioritization, a diverse strategy between both IRAs and a 401k may lead to a good investment portfolio.

Visit the following resources to learn more about contribution limits:

3. Invest in the stock market

If your retirement accounts are maxed out, you may want to start investing in other ways. Here are a few ways to get started:

  • ETFs. Investing in a low-cost exchange-traded fund (ETF) could be a good option if you want less fees more flexibility with your investments. ETFs are traded like stocks, so you will have the ability to get started with just one share.
  • Mutual funds. Mutual funds are another great way to get started investing in the stock market. Instead of buying a share, you buy into a fund.

Both of these are a good starting point for stock market investments.

Fees
$0.00 per trade

Per Trade Stock Trading Fee

Account Minimum
$0
Promotion

Cash bonuses are available for new accounts. Bonuses start at $50 if you deposit or transfer $10,000+.

Fees
$0.00 per trade

Per Trade Stock Trading Fee

Account Minimum
$0
Promotion

Get up to $600 when you open and fund an account within 60 calendar days of account opening, depending on deposited amount.

Fees
$2.95 per trade

Per Trade Stock Trading Fee

Account Minimum
$0
Promotion

Up to 100 free trades

4. Invest 50k into a 529 account

If you have children then you may want to consider investing that money in a 529 account. A 529 can help cover your child’s education expenses. Anything from private K-12 to graduate education can be paid for through this account.

According to the College Board, the average annual cost to attend college was between $9,970 and $34,740 for state and private schools respectively for the 2017-2018 academic school year. A 529 savings plan will allow you to invest in mutual funds and other investment vehicles through the plan. There are also some tax advantages associated with 529 accounts.

Investing $50,000 into a 529 may be a solid plan now if you intend to pay for your child’s higher education later on.

5. Create the best mix for your financial future

Everyone’s financial situation is unique, so there’s no one-size-fits-all investment strategy. Instead of investing the full 50,000 on one investment vehicle, it may be wise to have a healthy mix of investments.

As you go through the investment process, make sure to analyze and adjust your portfolio along the way. Investors should rebalance their investments on a regular basis to maximize the effectiveness of their portfolio.

Think about your goal

Before you get started, think about why you want to invest 50k in the first place. You have plenty of options to build the right investment portfolio, but you’ll need to create a portfolio that will take you where you want to go.

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.

Sarah Sharkey
Sarah Sharkey |

Sarah Sharkey is a writer at MagnifyMoney. You can email Sarah here

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Investing

USAA Investments Review 2019

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

USAA is known for their great workplace and customer service. One in four employees are veterans or military spouses. These are attractive traits to draw in customers who are military service members.

USAA offers a slew of different products, including car, health and homeowners insurance. They also have checking accounts, mortgages and personal loans available as well, though this review will focus on the company’s investing products. While most of USAA’s offerings target military service members and their families, anyone can open an investment account.

USAA Investments
Visit USAASecuredon USAA Investments’s secure site
The Bottom Line: Unless you’re already a member of USAA and want to keep your investments within one company, you don’t need to put your money here.

  • A $3,000 minimum balance is hefty.
  • High costs per trade and other fees.
  • Longevity is attractive but costs are a turnoff.

Who should consider USAA Investments?

Online brokers are a great way to let you manage your money, whether you’re new to investing or you’ve been handling them for years.

If you’re already a USAA member, enlisting them to be your online broker is enticing. Keeping your money all in one place can be a convenient option, and you can talk to real, live people when you have investment questions or concerns.

If you’re looking for a specific kind of account, such as a custodial or SIMPLE IRA, you can find it at USAA. Their long list of various account types can be a big draw if you need something in particular.

USAA Investments fees and features

Stock trading fees
  • $8.95 per trade
Amount minimum to open account
  • $500.00
Tradable securities
  • Stocks
  • ETFs
  • Mutual funds
  • Bonds
  • Options
Account fees (annual, transfer, inactivity)
  • $70 full account transfer fee
  • $20 partial account transfer fee for a security through the Direct Registration Service (DRS); $0 to transfer a security that is not eligible for DRS.
  • $10 if less than $100 in account and no activity for 12 months
Commission-free ETFs offered
Mutual funds (no transaction fee) offered
Offers automated portfolio/robo-advisor
Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • 529 Plan
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
  • Custodial Uniform Gifts to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA)
  • Custodial IRA
  • SEP IRA
  • SIMPLE IRA (Savings Incentive Match Plan for Employees)
  • Trust
  • Guardianship or Conservatorship
Ease of use
Mobile appiOS, Android
Customer supportPhone, 4 branch locations
Research resources
  • Earnings press releases
Fees
$8.95 per trade

Per Trade Stock Trading Fee

Account Minimum
$500.00
Promotion
N/A
Fees
$0.00 per trade

Per Trade Stock Trading Fee

Account Minimum
$0
Promotion

Get up to $600 when you open and fund an account within 60 calendar days of account opening, depending on deposited amount.

Fees
$0.00 per trade

Per Trade Stock Trading Fee

Account Minimum
$0
Promotion
N/A

Strengths of USAA Investments

Extensive choice for different accounts: You’ve got your choice of different accounts to choose from when signing up for a USAA brokerage account. If you’re a business owner and need an SEP or SIMPLE IRA (Savings Incentive Match Plan for Employees), you can take your pick. If you need a Custodial IRA or 529 Plan, they’re available. There’s also joint accounts, trusts and conservatorship accounts.

Great customer service: While a machine answers your phone call, it doesn’t take much time or effort to get to a human representative. Whether you have a question about certain stock performance or less-risky exchange-traded funds (ETFs), the easy customer experience spans across USAA’s product offerings.

A robo-advisor option is available: To complete with robo-advisor companies, USAA offers their Digital Investment Advisor. If you like the idea of a robo-advisor and a brokerage in one, USAA has the best of both worlds for you. Keep in mind that the annual fee for the robo-advisor is 0.50% a year — that’s double other leading robo-advisors like Wealthfront or Betterment.

Drawbacks of USAA Investments

High trading costs: $8.95 per trade is pricey. Other companies charge anywhere from $4.95 to $6.95 per trade. This could deter new investors from making any transactions and active investors might find this too costly for their taste.

Lots of fees: There’s a fee for almost everything. A transfer fee, whether partial or full, can range from $20 to $70. If you aren’t active in your account for a year, you’ll get charged $10 and then your account will close. Make sure you fully understand the rates and fees, or you might get stuck paying way more than you expected.

Restricted expansion to other products: While USAA Investments is open to the general public, it’s hard to get access to their other products — such as health insurance or loans — unless you’re in the military or related to a service member.

Limited info available online: If you have specific questions or concerns regarding your investment account, you may have trouble tracking down answers on USAA’s website. Though many competitors have detailed FAQs to help consumers, you may need to speak with a customer service rep to find answers at USAA.

Is USAA Investments safe?

Investing in any form carries risk. As you look into different investment accounts, it’s important to see if a company has security measures in place in case fraud or other theft takes place.

USAA doesn’t have a policy in place that ensures members get their money back in the event of fraud, identity theft or other malicious activity. The most you can do is call to report suspicious activity, but there’s no guarantee you’ll get a refund for the lost cash. However, USAA is a member of the SIPC — Securities Investor Protection Corporation — which means your money is insured if the company goes under.

Final thoughts

For current USAA members, having your investments under the same umbrella as some other products you use could be a useful option. But for those who don’t serve in the military or those who aren’t related to servicemembers, you may find better options elsewhere.

A high account minimum with high trading costs means you can find less-expensive options elsewhere.

Open an USAA Investments accountSecured
on USAA Investments’s secure website

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.

Dori Zinn
Dori Zinn |

Dori Zinn is a writer at MagnifyMoney. You can email Dori here