Non-Spouse Beneficiaries and Roth IRA Distributions: Today's Slott Report Mailbag
By Andy Ives, CFP®, AIF®
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On September 6th in a piece titled, “Rules for Inherited IRAs that May Surprise Nonspouse Beneficiaries,” Sarah Brenner from Ed Slott and Company wrote, “If you inherited the IRA funds in 2020 or later, as a nonspouse beneficiary you will most likely be subject to a 10-year payout-period, possibly with annual RMDs during the 10-year period.”
My brothers and sisters and I are non-spousal beneficiaries, and my understanding is that there is no rule or code yet that states we must take some out of the inherited IRA account each year, only that it must be drained by end of the tenth year as required by the SECURE Act. My sibling says we must take some each year. Which of us is correct? We are all under the RMD age, in our sixties and our parents passed September of 2022.
On February 23, 2022, the IRS issued proposed regulations, taking the position that when death occurs on or after the required beginning date (RBD), a non-eligible designated beneficiary (like you and your siblings) must take annual required minimum distributions (RMDs) AND empty the account under the 10-year rule. (The rule requiring annual RMDs when an account owner dies on or after her RBD is sometimes called the “at least as rapidly” rule.) The IRS’s interpretation of the SECURE Act is still being debated. In fact, while this discussion continues, IRS Notice 2022-53 and Notice 2023-54 waived penalties for missed 2021, 2022 and 2023 RMDs within the 10-year period. While we wait for the final regulations (which could take many years to finalize) we follow the proposed regulations which require RMDs within the 10-year period for certain beneficiaries.
My wife wants to contribute from her compensation from her job to a Roth IRA. Does she have to wait five years to touch her contributions, or can she access them whenever, if necessary? I'm not talking about the earnings in the Roth IRA, only the contributions.
Based on strict Roth IRA distribution ordering rules, contributions come out first, then Roth conversions, then earnings. These ordering rules apply across all of a person’s Roth IRAs, regardless of how many exist or where they are held. Be aware that the IRS views all of a person’s Roth IRAs as one large bucket of money. (It does not matter if the individual thinks of their accounts as “my contributory Roth” and “my converted Roth.”) Within that combined Roth IRA bucket, the owner always has access to their Roth IRA contributions tax- and penalty-free, regardless of age.
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