Most retirement accounts have a limited shelf life: Because taxes are deferred on the money in certain accounts until the owner begins withdrawing them, the IRS enforces required minimum distributions beginning at age 70½.
That’s not the case with the Roth individual retirement account, which is not subject to required minimum distributions, or RMDs. In fact, a Roth IRA account owner can continue contributing at any age and pass the full balance to a beneficiary at death.
Roth IRAs and required minimum distributions
Required minimum distributions apply to both traditional IRAs and 401(k)s, as well as other employer-sponsored retirement plans. Because these accounts are typically funded with pretax dollars and taxed only when distributions occur in retirement, the IRS is itching to collect that revenue. So it requires that owners withdraw a minimum amount — determined by an IRS formula that weighs account balance and life expectancy — each year, beginning at age 70½.
But Roth IRAs are funded with after-tax dollars, and qualified distributions aren’t taxed. So the IRS has no vested interest in requiring minimum distributions while the account holder is alive.
Inherited Roth IRAs and required minimum distributions
As with any IRS rule, there are exceptions. With Roth IRA required minimum distributions rules, those exceptions come after the account owner dies and a beneficiary inherits the account. At that point, the Roth IRA may become subject to required minimum distributions.
If you’ve inherited a Roth IRA, you don't have to take required minimum distributions in the year of the original account owner’s death. If the IRA was owned by your spouse and you’re the sole beneficiary, you get even more leeway: You can put off distributions until your spouse would’ve turned 70½, or you can treat the Roth IRA as if it were your own, putting off required minimum distributions altogether.
There’s one important note about Roth IRA withdrawal rules, whether the account is inherited or not: Contributions made to the account can always be removed without taxes or penalties, but there is a separate rule for the investment earnings on those contributions. To avoid taxes and a 10% early withdrawal penalty on earnings, distributions that include earnings must be qualified.
If the account owner has died, you’ve already satisfied part one of the qualified distribution requirements. Part two is that the account must meet a five-year holding period, which means that five years have passed since Jan. 1 of the first year the account owner made a contribution to a Roth IRA. If the owner dies before the end of that five-year period, any earnings distributed may be included in your income for tax purposes.
If you inherit a Roth IRA and you aren't the spouse of the original owner, your options narrow a bit — for one thing, you don’t have the option to take the Roth IRA as your own and skirt distributions. You can either take the money now, use the five-year timeline or take distributions based on your life expectancy.
Non-spouse inherited Roth IRA elections
I want the money now.
I want the money soon.
I want to put off distributions.
Required minimum distributions, or RMDs
You’ll liquidate the account as a lump sum, so RMDs aren't applicable.
You must withdraw the entire Roth IRA balance by Dec. 31 of the fifth year after the year the original account owner died.
RMDs must begin no later than the end of the year after the year of the original account owner's death. RMD amounts are based on your life expectancy.
Good to know
If the account doesn’t meet the Roth IRA five-year holding rule, you may be taxed on earnings.
You can take distributions throughout the five years, as long as the account meets the five-year holding rule. If it doesn’t, you may be taxed on earnings.
You can take distributions at any time, but distributions of earnings may be taxed if the account hasn’t met the Roth IRA five-year holding rule.
Note that if there are multiple beneficiaries inheriting the account, you must each establish separate accounts by the end of the year following the year of the original owner's death if you want to base required minimum distributions on your own life expectancy. If you miss that deadline, the required minimum distributions will be based on the life expectancy of the oldest beneficiary, which leads to a higher minimum distribution amount.
If you are required to take required minimum distributions from an inherited Roth IRA and you don’t do so — or you take less than the amount required — you may be hit with a 50% tax on the amount not distributed.