ANOTHER Inherited IRA Question, ROTH this time..

[kite_rider]

So much confusion about inherited IRA's before and after the Secure 2.0 ACT. This forum has been great on clearing it up!

I inherited a Traditional IRA and a Roth IRA from my mother back in 2019. I've been taking 'stretch' RMD's every year since on both accounts.

1st: Is it safe to say that Inherited IRA's (both traditional and Roth) that occurred prior to 2020 are not subject to the new Secure 2.0 ACT rules? Instead, they are only subject to the rules that were around at the time of death? I ask since we just clarified (in a separate post) that people who were able to take 'Stretch' RMD's in the past can continue to do so. However, I'm guessing that these same people can not skip RMD's now and in recent years that people who inherited after 2020 can do (until 2025).

So if I have that correct; then I just need to make sure that I know what the rules USE TO BE on Roth IRA's as well. I've heard conflicting accounts and most of the press / articles talk about the new current rules. I've been taking 'stretch' RMD's but am unclear if it's required or not. Ideally, I'd just let the Roth account continue to grow if I can legally do it.

Can anyone enlighten me on what you needs to be done with RMD's on Inherited Roth IRA's prior to 2020? Thanks and hope this info helps others as well.

 

[cathy63]

You continue to take RMDs from both accounts until they are emptied. The original divisor was whatever you looked up based on your own age in the Single Life Expectancy Table that was in effect at the time. You subtract one from the life expectancy for every subsequent year.

However, since the Single Life Expectancy Table changed in 2022, you're allowed to go back and look up the new number for the age you were in 2020 and subtract 2 from that to get your new 2022 divisor. After that you continue subtracting 1 each year.

With inherited accounts, eventually you will have to empty the entire account. This is different from your own IRA where you do a lookup every year for the divisor, so it will never go as low as 1.

 

[kite_rider]

Thanks! So a Roth is treated just like a Traditional IRA and you MUST take RMD's on it.

 

[SecondCor521]

While cathy63 is fantastically sharp on taxes in general and I usually just read her posts to confirm (or learn) the right answer, in this case I do disagree on one point: It is my understanding that RMDs have never been required on inherited Roth IRAs.

I tried to start wading through IRS Pub 590-B to confirm my belief, but it became tricky because I don't know the OP's fact set exactly and the rules are very complicated.

The general understanding I have for my fact set (which differs from OP's fact set in that OP inherited prior to 1/1/2020 and possibly other ways as well) is that RMDs are not required from Roth IRAs because the original owner is treated as passing away before their RBD. In my fact set, I am fairly certain I will be subject to the SECURE 10-year rule, but not RMDs.

I did find this quote from a Kitces article, and I generally trust him to get things right:

"The death of a Roth IRA owner will always be considered as taking place before their RBD (even if they have Traditional IRA money as well), and, thus, their beneficiaries will never be subject to annual distributions during the 10-Year Rule."

-- IRS New Final Regulations: 10-Year Rule, Beneficiaries, RMDs

It is in a section talking about workplace Roth plans, though, so even though I think it is correct and applicable, others may doubt the quote's applicability.

OP, there are new final regulations issued by the IRS this summer (July 2024), but they are, again, quite complicated to read through, filled with technical jargon, and apply to a bunch of situations including yours so much of it would be irrelevant.

What I would probably do, were I in your shoes, is read through the latest IRS Pub 590-B keeping your fact set in mind and see what conclusion you come to. I'd then read the next iteration of Pub 590-B in case it incorporates any updates from the July 2024 regulations that apply to you.

 

[cathy63]

While cathy63 is fantastically sharp on taxes in general and I usually just read her posts to confirm (or learn) the right answer, in this case I do disagree on one point: It is my understanding that RMDs have never been required on inherited Roth IRAs.

Thank you for the kind words, but I'm certainly wrong quite often! I don't think I am wrong in this case though, because I wasn't sure, so I googled for it and used an IRS source for my answer: Retirement topics - Beneficiary | Internal Revenue Service (This page is actually linked in the 2023 Pub 590-B, so hopefully it is up-to-date.)

kite_rider inherited his/her IRAs in 2019, so that was before the SECURE Act went into effect. As far as I can tell, the IRS says you do have to take RMDs from the Roth IRA.

Death of the account holder occurred before 2020​

...​

Non-spouse beneficiary options​

If the account holder's death occurred prior to the required beginning date (or if the account is a Roth IRA), the non-spouse beneficiary's options are:

• Take distributions based on their own life expectancy, beginning the end of the year following the year of death, or
• Follow the 5-year rule

If the account holder's death occurred after the required beginning date, the non-spouse beneficiary may:

• Take distributions based on the longer of their own life expectancy or the account owner's remaining life expectancy.

...

Inherited Roth IRAs​

Generally, inherited Roth IRA accounts are subject to the same RMD requirements as inherited traditional IRA accounts. Withdrawals of contributions from an inherited Roth are tax free. Most withdrawals of earnings from an inherited Roth IRA account are also tax-free. However, withdrawals of earnings may be subject to income tax if the Roth account is less than 5-years old at the time of the withdrawal.

Distributions from another Roth IRA cannot be substituted for these distributions unless the other Roth IRA was inherited from the same decedent.

 

[SecondCor521]

Thanks for the reply, @cathy63!

My vague recollection is that the first SECURE act modified the second bullet point:

• Follow the 5-year rule

to allow a 10 year distribution instead of a 5 year distribution. But I'd have to go dig through it, and, now that I think about it, that may only apply for IRAs inherited after 1/1/2020.

I have to go do some w*rk with my son on his business, but I think this quote from the current Pub 590-B encapsulates my thoughts:

"The 5-year rule applies to beneficiaries who are not designated beneficiaries if the owner died before their required beginning date (such as an estate or trust (but see Trust as beneficiary, later)). Before 2020, it also applied to designated beneficiaries who are not taking life expectancy payments. If the owner died after 2019 and the beneficiary is an individual who is a designated beneficiary, see the 10-year rule, for more information.

10-year rule. The 10-year rule requires the IRA beneficiaries who are not taking life expectancy payments to withdraw the entire balance of the IRA by December 31 of the year containing the 10th anniversary of the owner’s death. For example, if the owner died in 2023, the beneficiary would have to fully distribute the IRA by December 31, 2033."

-- page 10 at https://www.irs.gov/pub/irs-pdf/p590b.pdf

In OP's, case, I think they can follow the 10 year rule and deplete the Roth IRA by 12/31/2029 and skip RMDs by electing the 5 year rule which is now the 10 year rule.

I didn't check the link you posted for time reasons, @cathy63, but I'm sure you quoted it accurately and it's an applicable link. I think I've seen a few cases where the IRS has stale pages on their website; I'm not sure if this represents an example of that or not.

 

[Texas Proud]

Well, I have not gone into the laws so here is what I got from both Fidelity and Vanguard.... my mom also died in 2019..

You have to take RMDs... and the kicker to me was that it is NOT the table rate... I argued with a guy from Vanguard that they took too much and he went and did research and said that the number they used was correct... I had a larger distribution than what the table would have suggested..

Now, it might have been that my mom was 99 and already taking RMDs or that I was almost 40 years younger... but it was NOT the table...

I also do not look up what my RMD is... I just look at what the broker says it is and take that... easy peasy...

 

[kite_rider]

Glad I'm not the only one who's had to struggle just to understand this and thanks Cathy63 for being smart enough to find (and POST!) the right answer from Google. 2020 was a confusing time since people kept quoting me rules from the new Secure 2.0 act and they were having a hard time interpreting those rules.

I'd be careful about taking advice from brokers / advisors / etc. In my experience I got DIFFERENT advice from just about every person I asked...

 

[cathy63]

Right, the SECURE Act was not retroactive. If you inherited your IRAs in 2019, you have to follow the old rules, not the new ones.

 

[cathy63]

Well, I have not gone into the laws so here is what I got from both Fidelity and Vanguard.... my mom also died in 2019..

You have to take RMDs... and the kicker to me was that it is NOT the table rate... I argued with a guy from Vanguard that they took too much and he went and did research and said that the number they used was correct... I had a larger distribution than what the table would have suggested..

That is very interesting. They should have used the Single Life Expectancy table that was in effect in 2019, which is this one: 2019 Single Life Table for Inherited IRAs - Ed Slott and Company, LLC

There is a different table for withdrawing from your own IRA if you're married and a third one if you have a much younger spouse, so maybe they were reading from one of those instead of from the single life table.

Also, I know this is water under the bridge now, but you are allowed to ignore Vanguard and anybody else who calculates your RMDs for any type of IRA. You are personally responsible for taking the correct RMD, so if you believe your calculation is more accurate, you can use that.

 

[SecondCor521]

Thanks for the reply, @cathy63!

My vague recollection is that the first SECURE act modified the second bullet point:

• Follow the 5-year rule

to allow a 10 year distribution instead of a 5 year distribution. But I'd have to go dig through it, and, now that I think about it, that may only apply for IRAs inherited after 1/1/2020.

I have to go do some w*rk with my son on his business, but I think this quote from the current Pub 590-B encapsulates my thoughts:

"The 5-year rule applies to beneficiaries who are not designated beneficiaries if the owner died before their required beginning date (such as an estate or trust (but see Trust as beneficiary, later)). Before 2020, it also applied to designated beneficiaries who are not taking life expectancy payments. If the owner died after 2019 and the beneficiary is an individual who is a designated beneficiary, see the 10-year rule, for more information.

10-year rule. The 10-year rule requires the IRA beneficiaries who are not taking life expectancy payments to withdraw the entire balance of the IRA by December 31 of the year containing the 10th anniversary of the owner’s death. For example, if the owner died in 2023, the beneficiary would have to fully distribute the IRA by December 31, 2033."

-- page 10 at https://www.irs.gov/pub/irs-pdf/p590b.pdf

In OP's, case, I think they can follow the 10 year rule and deplete the Roth IRA by 12/31/2029 and skip RMDs by electing the 5 year rule which is now the 10 year rule.

I didn't check the link you posted for time reasons, @cathy63, but I'm sure you quoted it accurately and it's an applicable link. I think I've seen a few cases where the IRS has stale pages on their website; I'm not sure if this represents an example of that or not.

Gaack.

I just re-read my post above, which I wrote somewhat in haste.

The correct conclusion, I now realize, is that the OP must follow either RMDs or the 5 year rule, as @cathy63 posted earlier. The 10 year rule for Roth IRA depletion only applies to folks who inherited after 2019 (which will include me, which is why I was confused).

 

[Dalton]

That is very interesting. They should have used the Single Life Expectancy table that was in effect in 2019, which is this one: 2019 Single Life Table for Inherited IRAs - Ed Slott and Company, LLC

There is a different table for withdrawing from your own IRA if you're married and a third one if you have a much younger spouse, so maybe they were reading from one of those instead of from the single life table.

Also, I know this is water under the bridge now, but you are allowed to ignore Vanguard and anybody else who calculates your RMDs for any type of IRA. You are personally responsible for taking the correct RMD, so if you believe your calculation is more accurate, you can use that.

Agreed. The IRS won't be interested in calling Vanguard if they have some issue with your RMDs. I read the code, took some notes for myself in case anybody asks how I arrived at my number, and went with it. Worst case is I end up with a penalty, best case is I never hear a word about it, 2nd best case is I have to take more some year to correct previous issue and ask for penalty waiver, explaining that I tried to figure it out.

 

[kgtest]

That is very interesting. They should have used the Single Life Expectancy table that was in effect in 2019, which is this one: 2019 Single Life Table for Inherited IRAs - Ed Slott and Company, LLC

There is a different table for withdrawing from your own IRA if you're married and a third one if you have a much younger spouse, so maybe they were reading from one of those instead of from the single life table.

Also, I know this is water under the bridge now, but you are allowed to ignore Vanguard and anybody else who calculates your RMDs for any type of IRA. You are personally responsible for taking the correct RMD, so if you believe your calculation is more accurate, you can use that.

I could see them confusing the tables. When I bounce back in forth between them I consciously say aloud the table ID number I am referencing.

 

[Texas Proud]

That is very interesting. They should have used the Single Life Expectancy table that was in effect in 2019, which is this one: 2019 Single Life Table for Inherited IRAs - Ed Slott and Company, LLC

There is a different table for withdrawing from your own IRA if you're married and a third one if you have a much younger spouse, so maybe they were reading from one of those instead of from the single life table.

Also, I know this is water under the bridge now, but you are allowed to ignore Vanguard and anybody else who calculates your RMDs for any type of IRA. You are personally responsible for taking the correct RMD, so if you believe your calculation is more accurate, you can use that.

Thanks... it was not enough money to argue about...

My share of the account was about $20K... it was spread over 6 people... the other was ROTH so no tax on that..

 

[Bonanza9]

I'd appreciate any opinions on where to "park" an inherited IRA to keep the principal as secure as possible until the date when it must come out in 6 years--but still getting the best yield/interest with a conservative investment (vs equities). Brokered CDs? Treasury Note? Multiple Treasury Bills, laddered? The issue is if there is a major market drop (nobody knows!) at any point between now and the "must cash out in 6 years" I'm dealing with, I'll be very sad. I don't really want to risk with this account since it has a "timer" on it. What would you do? Thanks.

 

[SecondCor521]

I'd appreciate any opinions on where to "park" an inherited IRA to keep the principal as secure as possible until the date when it must come out in 6 years--but still getting the best yield/interest with a conservative investment (vs equities). Brokered CDs? Treasury Note? Multiple Treasury Bills, laddered? The issue is if there is a major market drop (nobody knows!) at any point between now and the "must cash out in 6 years" I'm dealing with, I'll be very sad. I don't really want to risk with this account since it has a "timer" on it. What would you do? Thanks.

My plan is to invest an inherited IRA along with the rest of my portfolio to my overall AA. To the extent that my overall AA calls for an allocation to bonds, I would put those in an inherited traditional IRA.

I would ignore the "timer" aspect and take my lumps or luck however it turned out. I do not make any connection with a "timer" and the notion of risk. The withdrawals for me would affect my taxes but not my spending.

I currently have a very very low WR. If I had a higher spending need (i.e., if I needed the inherited IRA funds to live on), then my plan would be different.

 

[TheWizard]

My plan is to invest an inherited IRA along with the rest of my portfolio to my overall AA. To the extent that my overall AA calls for an allocation to bonds, I would put those in an inherited traditional IRA...

I would do the same.
I don't hold any bonds or bond funds, so I'd be 95% in stock index funds.
But then, I have a negative withdrawal rate so that's different from most folks...

 

[Texas Proud]

Yes, remember that the timer is just taking the money OUT of the IRA... not spending it...

You can keep the net invested the way it was before the timer... or pay taxes from some other source and keep it all invested the same..

 

[spencnor]

Death of the account holder occurred before 2020​

Non-spouse beneficiary options​

If the account holder's death occurred prior to the required beginning date (or if the account is a Roth IRA), the non-spouse beneficiary's options are:

• Take distributions based on their own life expectancy, beginning the end of the year following the year of death, or
• Follow the 5-year rule

I had to research this issue earlier to aid my niece who inherited a Roth IRA from her father who died in 2019. It’s important to read the 2019 (pre-Secure Act) version of IRS publication 590-B, which is outlined above. My niece, however, did not start taking the inherited Roth distributions in 2020, the year after her father’s death. Thus she had to liquidate the Roth this year to comply with the 5 year rule.

 

[CRLLS]

When I come to such rules for RMDs, I generally do not seek answers from others. I read the IRS rules on the SSA site and make sure that the page is current and not an older rule, sometimes those pages are old. At least shouldn't get a penalty if I honestly misinterpreted their site. I'm not saying that asking others is bad. One can be remembering wrong, reciting only a partial answer or mistyping or a myriad of other explanations of incorrect writings. I too, am subject to that.

The bottom line is the IRS is the determining party that decides if you did it right or not. Check their website. This year, as the RMD rules of inherited accounts is so convoluted, we completely emptied DW's Inherited IRA of mid five-figures and paid the tax collector. The other reason we did that is next year starts our own RMDs. We don't want to go too far into IRMAA territory in a few years.

 

[Exchme]

I'd appreciate any opinions on where to "park" an inherited IRA to keep the principal as secure as possible until the date when it must come out in 6 years--but still getting the best yield/interest with a conservative investment (vs equities). Brokered CDs? Treasury Note? Multiple Treasury Bills, laddered? The issue is if there is a major market drop (nobody knows!) at any point between now and the "must cash out in 6 years" I'm dealing with, I'll be very sad. I don't really want to risk with this account since it has a "timer" on it. What would you do? Thanks.

Yes, since inherited pre-tax IRAs have the least preferential holding period of all tax advantaged accounts, I hold the most conservative parts of the asset allocation there. Any amount of growth will eventually be taxed as ordinary income and very soon. For me, that conservative investment is BND, but you listed several good options.

 

[TheWizard]

Yes, remember that the timer is just taking the money OUT of the IRA... not spending it...

You can keep the net invested the way it was before the timer... or pay taxes from some other source and keep it all invested the same..

You are correct, but unlike Roth conversions, the amount of an RMD you reinvest in your taxable account is a lot fuzzier.

Example: your RMD is $20,000 so you w/d that as a lump sum, having $3000 withheld for taxes. You then reinvest the remaining $17,000 in your taxable account.

But then over remaining months of the year, you invest an additional $10,000 of excess income from SS+ pension/annuities into that same taxable account, for $27,000 total.

I do something like that but not everyone has excess retirement income...

 

[Bonanza9]

Yes, since inherited pre-tax IRAs have the least preferential holding period of all tax advantaged accounts, I hold the most conservative parts of the asset allocation there. Any amount of growth will eventually be taxed as ordinary income and very soon. For me, that conservative investment is BND, but you listed several good options.

Thanks. The thing is it's a Roth, so there won't be any taxes on it, but still interested in keeping it conservative since if any market dip occurs in the next 6 years, there is potentially no time to wait out gains to come back since the account is on an inherited "timer".

 

[Exchme]

Thanks. The thing is it's a Roth, so there won't be any taxes on it, but still interested in keeping it conservative since if any market dip occurs in the next 6 years, there is potentially no time to wait out gains to come back since the account is on an inherited "timer".

Since it's a Roth, your choice may or may not be the optimal one. You want to preferentially put bonds in tax deferred accounts where the taxation of the asset (bond dividends taxed as ordinary income) matches the taxation of the account (tax deferred withdrawals are ordinary income).

If your tax deferred is already full of bonds, then, yes, you need another place to put bonds and Roth (whether inherited or not) is OK. The disadvantage is that bonds are likely slower growing than stocks, the advantages are you keep bond dividends out of taxable and you don't have to rebalance in taxable. I think the answer as to which is better is situational and beyond the current generation of consumer tools to figure out.

 

[Dtail]

I have an inherited Roth IRA question too.
My brother has a Roth IRA outside of his Irrevocable trust account. I am the beneficiary.
Since I am within 10 years of his age (younger), then am I considered an eligible beneficiary and am not subject to the 10 year mandatory withdrawal rule?