IRS Clarifies Required Minimum Distribution Rules for Roth IRA Beneficiaries

Winter 2017Articles 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.