RMDs and the Five-Year Rule

Submitted by Bob Foland on Thu, 2023-03-23 16:56

Dave opened a Roth in 2019. He died in 2020 at age 80. Bob, Dave’s son, inherited Dave’s Roth. Since the account had been opened for such a short period of time, most of the account value is Dave’s contribution which will allow Bob to take RMDs without touching earnings.

If the circumstances were the same except for some unusually large investment returns, it’s conceivable that the RMD is greater than the basis in the Roth. If the beneficiary were taking earnings as part of the RMD, AND the Roth had not met the five-year requirement, how would the withdrawal for the RMD be treated? Can the RMD for a DB (who’s not an EDB) force a withdrawal that results in a penalty for violating the five-year rule?



Submitted by Alan - IRA critic on Thu, 2023-03-23 17:57

  • In the extreme case of massive gains such that a distribution (whether RMD or not) included gains prior to completion of the 5 years, the gains would be taxable. There is no penalty, just ordinary taxes on those gains and the distribution must be reported on Form 8606 until the Roth IRA is qualified (2024).
  • But because this is a Roth IRA, Dave is treated as passing prior to RBD regardless of his age, and as such Bob does not have to take any annual beneficiary RMDs. He could wait until 2030 and accumulate tax free gains and take a total distribution in 2030 which would be tax free. Or he could wait until 2024 when the Roth will be qualified and entirely tax free.  That would avoid any tax on gains and also Form 8606 would not be needed.

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