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Roth IRA RMDs, what!
Old 11-22-2013, 08:44 PM   #1
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Roth IRA RMDs, what!

My question concerns a non spousal inherited Roth IRA. I will leave my Roth IRA to my sister, why is she subject to RMDs? There is no tax on Roth IRA distributions so why would there be RMD requirements? This makes no sense so obviously (?) I am missing something.

I found this and it's long but it does indicate a non spousal inherited Roth IRA is subject to RMDs! The bold is my emphasis.

Roth IRA Required Minimum Distribution (RMD)

Let's assume the owner (whether the original owner or the surviving spouse who has accomplished a spousal rollover) of the Roth IRA has died and that a beneficiary who is not the spouse is now subject to Required Minimum Distributions rules. The beneficiary will have to take out the entire balance by December 31st of the year containing the fifth anniversary of the owner's death or the beneficiary will have to start taking distributions over the beneficiary's life expectancy starting no later the December 31st of the year following the year of the owner's death. If distributions to the beneficiary do not start by December 31st following the year of the owner's death, the rule requiring a complete distribution of the plan balance within five years will become effective. So it is very important to properly start distributions in the year after the owner's death if one wants to be able to take best advantage of the Roth IRA. Generally, a written election to this effect should be filed with the plan administrator as soon as possible.

A beneficiary would be well-advised to try take advantage of the ability to take withdrawals from the inherited Roth IRA over their life expectancy. The funds in the Roth IRA will continue to grow and compound tax-free while still part of the Roth IRA and the distributions from the Roth IRA will be tax-free as well. Imagine having an account that grows tax-free during your lifetime and pays you tax-free amounts on a yearly basis! That is what a Roth IRA can be to your heirs, such as your children and grandchildren. This after-death tax-free growth is sometimes referred to as the stretchout IRA concept. It is generally considered to be one of the two most valuable aspects of a Roth (the other being the post-70 tax-free compounding). While Traditional IRAs also have a stretchout aspect, their tax-deferred stretchout is considerably less valuable than the tax-free stretchout offered by the Roth IRA.

How are Required Minimum Distributions calculated for the beneficiary of a Roth IRA? Let's assume a Roth IRA owner who was born on January 1st dies at the age of 90 and leaves the Roth IRA to a child who becomes 60 years old during that year. The child would have to take their first distribution in the year after the owner's death or in a year when they would be 61. The single life expectancy from the IRS tables for a 61 year old is 19.2 years. So in that year they would have to withdraw an amount equal to the preceding year's December 31st balance divided by 19.2. The next year, they would reduce the life expectancy value by 1 to 18.2 and then by 1 to 17.2 in the following year and so on. This is the same Term Certain Method referred to earlier.
The Term Certain Method is the only method available to a beneficiary who is not the spouse. One attribute of this method is that it does not depend on the beneficiary's actual life expectancy. If one lives long enough, the entire balance will have been distributed. If one dies before the end of the payment period (effectively a 20 year payout period in the example), the payment stream could continue if the funds are not fully withdrawn earlier. Note: Some IRA Agreements require a full distribution after the death of the beneficiary.
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Old 11-22-2013, 09:02 PM   #2
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There is no tax on Roth IRA distributions so why would there be RMD requirements? This makes no sense so obviously (?) I am missing something.
It's the law. Maybe they don't want IRAs to pass on indefinitely, even though there are no tax implications for ROTHs.

No sense in getting all stressed about something that will cost you nothing either before or after your death.
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Old 11-22-2013, 10:17 PM   #3
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I'm not stressed over it but I am surprised by this cuz there's no tax implications in a Roth so why RMDs? It is a hassle for my sister to have to know this, remember it each year, take the right amount or be penalized, it's just BS plain and simple. Just more gubmint interference in our lives. I understand why there's RMDs on tax deferred but a Roth?
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Old 11-22-2013, 10:32 PM   #4
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Originally Posted by veremchuka View Post
there's no tax implications in a Roth so why RMDs?
I'm guessing it's to force funds out of a tax-free vehicle and and into an investment or activity that will generate taxes.
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Old 11-22-2013, 10:52 PM   #5
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I'm guessing it's to force funds out of a tax-free vehicle and and into an investment or activity that will generate taxes.
Exactly, otherwise the ROTHs could grow tax free for ever from generation to generation.


If the person receiving the ROTH is concerned about forgetting to do RMDs then a big advantage over inheriting a regular IRA is that the ROTH can be cashed in entirely in a single year with no tax implication.
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Old 11-23-2013, 12:09 AM   #6
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Originally Posted by veremchuka View Post
I'm not stressed over it but I am surprised by this cuz there's no tax implications in a Roth so why RMDs? It is a hassle for my sister to have to know this, remember it each year, take the right amount or be penalized...
Your sister will not have to remember each year to take money out of the Roth. It's a set and forget situation. She will not have to figure out the right amount, the brokerage or bank will do it for her (without her asking). At least that's been our experience with three different brokerages and/or banks.
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Old 11-23-2013, 07:48 AM   #7
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I'm guessing it's to force funds out of a tax-free vehicle and and into an investment or activity that will generate taxes.
+1 that was my guess as well.

But if the recipient is eligible to make Roth contributions based on their own earnings they could just take it out of the inherited Roth and make a contribution to their own Roth. Or if they don;t qualify to make Roth contributions because they don;t have income but they do qualify to contribute to a HSA they could just take it out of the inherited Roth and make a contribution to their HSA.
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Old 11-23-2013, 08:07 AM   #8
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A beneficiary would be well-advised to try take advantage of the ability to take withdrawals from the inherited Roth IRA over their life expectancy. The funds in the Roth IRA will continue to grow and compound tax-free while still part of the Roth IRA and the distributions from the Roth IRA will be tax-free as well. Imagine having an account that grows tax-free during your lifetime and pays you tax-free amounts on a yearly basis!
Bold emphasis above is mine. That's nice! The fortunate heir would not complain about this.

In the future, if there are more people passing large Roth accounts to heirs, I will not be surprised to see the law changed to require the entire account be rolled out. The principal will stay untaxed, but the future gain and dividend become taxable to the heir. Even with that, one still cannot argue that it is not fair.
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Old 11-23-2013, 03:36 PM   #9
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Thanks.

I was thinking about this today before coming here and came to the same conclusion that several people mentioned that being forcing money out of the Roth requires it to go somewhere else and that somewhere else is likely to be a taxable account. Funny how that works huh?

In my sister's case, she may be better off taking the RMD over her lifetime vs the 5 year draw down as she can rely on it for living expenses while meeting the RMD requirement.
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Old 11-23-2013, 06:36 PM   #10
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Very nice that you are looking out for your sister. I'm impressed!
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Old 11-23-2013, 07:12 PM   #11
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Inherited Roth IRAs, Benficiary Roth IRAs and Stretch IRAs

Same rule different reading?
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Old 11-24-2013, 07:17 AM   #12
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Yes.
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