Fact Check: Are RMDs required for inherited Roth IRAs?

Are RMDs Required for Inherited Roth IRAs?

Introduction

The claim in question is whether required minimum distributions (RMDs) are mandated for inherited Roth IRAs. This topic has garnered attention due to changes in tax laws and regulations surrounding retirement accounts, particularly following the SECURE Act of 2019 and its subsequent updates. Understanding the rules surrounding RMDs for inherited Roth IRAs is crucial for beneficiaries who may be navigating these financial waters.

What We Know

1. RMDs for Roth IRAs: Roth IRAs do not require RMDs during the account owner's lifetime. However, upon the owner's death, the rules change significantly. Beneficiaries of inherited Roth IRAs must adhere to specific distribution requirements depending on when the original account owner passed away 47.

2. SECURE Act Implications: The SECURE Act of 2019 introduced a "10-year rule" for most non-spousal beneficiaries of inherited IRAs, including Roth IRAs, which mandates that the entire balance of the account must be distributed within ten years of the account owner's death 910. This effectively replaces the previous options for beneficiaries to take distributions over their lifetime.

3. Distribution Methods: If the original account owner died before 2020, beneficiaries could choose to withdraw funds over their lifetime or under the five-year rule. However, for those who passed away in 2020 or later, beneficiaries must fully deplete the account by the end of the tenth year following the death 89.

4. IRS Guidance: The IRS provides detailed guidance on the RMD rules for beneficiaries of IRAs, including Roth IRAs. According to the IRS, while RMDs are not required during the original owner's lifetime, they become applicable after death 13.

Analysis

The sources consulted provide a mix of IRS documentation and expert commentary from financial institutions, which are generally considered reliable. However, there are nuances in how different sources present the information:

• IRS Sources: The IRS is the definitive authority on tax-related matters in the U.S. Their guidelines are crucial for understanding the legal framework surrounding RMDs. The IRS documents 13 clearly outline the rules for beneficiaries of Roth IRAs, emphasizing that RMDs are not required during the owner's lifetime but do apply after death.

• Financial Institutions: Sources like Vanguard 4, Charles Schwab 5, and Fidelity 8 offer interpretations and summaries of the IRS rules. While these institutions are reputable, they may have a vested interest in providing guidance that encourages account management and investment, which could introduce a slight bias in how they present the information.

• News Outlets: Articles from Kiplinger 6 and CNBC 7 provide accessible summaries of the rules but may lack the depth of IRS documentation. They often aim to inform the general public and may simplify complex tax regulations, which can lead to potential misunderstandings.

• Conflicting Information: Some sources, like The Motley Fool 10, emphasize that RMDs are not required for inherited Roth IRAs but stress the necessity of withdrawing the entire amount within ten years. This highlights the importance of understanding the distinction between RMDs and the overall distribution requirement under the SECURE Act.

Methodological Considerations

The methodology behind the claims made in these sources generally relies on the interpretation of tax law as outlined by the IRS. However, the application of these laws can vary based on individual circumstances, such as the relationship between the beneficiary and the deceased, and the timing of the death relative to the SECURE Act's implementation.

Conclusion

Verdict: True

The evidence supports the conclusion that required minimum distributions (RMDs) are indeed mandated for inherited Roth IRAs, but only after the death of the account owner. The IRS guidelines clarify that while RMDs are not required during the owner's lifetime, beneficiaries must adhere to specific distribution rules following the owner's death, particularly under the SECURE Act's "10-year rule."

However, it is essential to note that the application of these rules can vary based on individual circumstances, such as the timing of the account owner's death relative to the SECURE Act's implementation. Additionally, while the IRS is a reliable source, interpretations from financial institutions and news outlets may introduce some variability in understanding these regulations.

Readers should remain aware of the nuances and complexities surrounding tax laws and retirement accounts. It is advisable to consult with a financial advisor or tax professional for personalized guidance. As always, critically evaluating information and seeking multiple sources is crucial for making informed financial decisions.

Sources

1. Required minimum distributions for IRA beneficiaries. IRS. Link
2. The RMD rules require individuals to take withdrawals from ... IRS. Link
3. Retirement plan and IRA required minimum distributions ... IRS. Link
4. Inherited IRAs: RMD rules for IRA beneficiaries. Vanguard. Link
5. Inherited IRA Rules & SECURE Act 2.0 Changes. Charles Schwab. Link
6. IRS Ends Inherited IRA Confusion: Annual RMDs Required for Many. Kiplinger. Link
7. Inherited Roth IRAs have required distributions. What to know. CNBC. Link
8. Inherited IRA Withdrawals | Beneficiary RMD Rules & Options. Fidelity. Link
9. Do Inherited Roth IRAs Have RMDs? Key Rules and Tax Implications. Accounting Insights. Link
10. Inherited a Roth IRA? Here's What You Need to Know About Rules, Taxes ... The Motley Fool. Link