INHERITED ROTH IRAs AND TRUST BENEFICIARY PAYOUTS: TODAY’S SLOTT REPORT MAILBAG

Thursday, November 07, 2024

By Ian Berger, JD
IRA Expert

Question:

For a non-spousal inherited roth IRA account, there seems to be contradictory advice on different websites about when to take distributions. Some say there are annual required minimum distributions (RMDs) within the 10 years; others say you can wait until the 10th year for a lump sum. If you can wait and don’t need the money, wouldn’t it be wiser to wait until the last year since the money compounds tax free and the final lump sum distribution would also be tax-free?

Regards,

Jake

Answer:

Hi Jake,

Most non-spouse roth IRA beneficiaries are subject to the 10-year payout period. The annual RMD requirement in years 1-9 never applies in this situation. So, yes, it would be smart to leave the inherited roth account until the end of the 10-year period for maximum accumulation of tax-free growth. Instead of the 10-year rule, a non-spouse beneficiary who is an “eligible designated beneficiary” can also choose to have annual RMDs stretched over her lifetime.

Question:

Does the same 10-year rule that applies to other non-spouse beneficiaries also apply when the beneficiary is a trust? My mom passed away in 2023 and left a small IRA to a trust for my sister and me.

Phyllis

Answer:

Hi Phyllis,

Yes, assuming the trust document satisfies the rules for being a “see-through trust,” then the trust for you and your sister would be subject to the 10-year payout rule. (This also assumes the trust is a “conduit trust,” where the IRA funds are paid to the trust and then immediately out to the trust beneficiaries.) However, if your mother died after the required beginning date for starting RMDs, the trust would also need to start receiving annual RMDs from the inherited IRA starting in 2025 – and through 2033 – based on the life expectancy of whichever of you is the oldest. (Annual RMDs for 2024 were waived by the IRS.)

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