IRS Clarifies Required Minimum Distribution Rules for Roth IRA BeneficiariesWinter 2017 – Articles For Your Benefit
Traditional IRAs and individual retirement annuities are subject to the required minimum distribution (RMD) rules which generally require that distribution begin by April 1 following the calendar year in which the IRA owner attains age 70-1/2. A 50% excise tax is imposed on any amounts which should have been distributed under the RMD rules but were not distributed on a timely basis, unless the IRS waives the tax.
Roth IRAs are not subject to the RMD rules, insofar as the IRA owner is concerned; however, the post-death RMD rules which apply to traditional IRAs also apply to Roth IRAs, except in situations in which the designated beneficiary is the surviving spouse. Thus, the entire interest in a Roth IRA which passes to a non-spouse beneficiary must be distributed: (1) by the end of the fifth calendar year after the year of the owner’s death (the “five-year rule”); or (2) over a period not greater than the non-spouse beneficiary’s life expectancy, with distribution beginning before the end of the calendar year following the year of death (the “life expectancy rule”).
In a recent Information Letter (Information Letter 2016-0071) the IRS clarified that when the Roth IRA permits the (non-spouse) designated beneficiary to select either the life expectancy rule or the five-year rule, the life expectancy rule automatically will apply unless the beneficiary affirmatively elects the five-year rule. Further, the life expectancy rule will apply, without regard to whether distributions, in fact, are made or commenced on a timely basis. So, for example, if the beneficiary elects to take distribution under the life expectancy method (expressly or by default) but fails to take the initial distribution on a timely basis, the distribution will not default to the five-year rule.