The Roth IRA Advantage Under the Final RMD Rules

Wednesday, August 21, 2024

Sarah Brenner, JD
Director of Retirement Education

In 2020, the SECURE Act completely changed the game for nonspouse IRA beneficiaries. Now, most are subject to the 10-year payout rule. Recently released final RMD rules keep the controversial proposed rule that requires many beneficiaries subject to the 10-year rule to also take annual required minimum distributions (RMDs) during the 10-year period.

Here is some good news if you are inheriting a Roth IRA. This confusing and burdensome requirement of annual RMDs during the 10-year period will not apply to you.

Here’s why. The requirement to take annual RMDs during the 10-year period only applies when the IRA owner died on or after his required beginning date (RBD). The RBD is date by which RMDs must begin. For IRA owners, this would be April 1 of the year following the year the individual reaches age 73. Roth owners, however, are not subject to lifetime RMDs. Therefore, they have no RBD. So, every Roth IRA owner is deemed to have died before their RBD, regardless of their age at death. For example, a Roth IRA owner who dies at age 100 is still deemed to have died before her RBD.

Under the new final RMD rules, beneficiaries of traditional IRAs who are subject to the 10-year rule must take annual RMDs in years 1-9 of the 10-year period when death occurs on or after the RBD. But this is not the case for a Roth IRA beneficiary, since all Roth IRA owners are considered to have died before their RBD.

This can allow the inherited Roth funds to continue to accumulate income tax free for the full 10-year term. This is a huge advantage for Roth IRA beneficiaries. The full balance of the inherited Roth must still be withdrawn by the end of the 10th year after death, but nothing has to be taken any earlier. The entire balance can then be withdrawn as a completely tax-free distribution.

Example 6: Miguel, age 80, dies in 2024. The beneficiary of his Roth IRA is his daughter, Madi, age 50. Madi will be subject to the 10-year rule, so the entire inherited Roth IRA must be distributed by December 31, 2034. However, she does not have to take annual RMDs during the 10 years.

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