By Kath Suchan, CFP®, CLU®
Siblings, you got to love them. First of all, I am the “baby of the family” and sometimes it is difficult for my five older siblings to realize that I may know just a bit more than they do when it comes to financial planning issues. There are times I feel like I am a five years old again carrying on the “Is so,” “Is not,” “Is so,” “Is not” intellectual exchange.
This article is a result of a lengthy discussion I had with one of my siblings regarding required minimum distributions (RMDs) and Roth accounts. In a nutshell, my sibling felt that “Roth” was equal to “No RMDs ever!” regardless of the account type. I then had the pleasure of [gently] correcting him. In case you are wondering, below are some common situations where RMD rules DO apply to Roth accounts.
- Inherited Roth IRAs (also known as Beneficiary Roth IRAs)
- Roth 401k accounts after you retire
- Roth 401k accounts if you are still working and the “5% owner” rule applies
Unfortunately, there is no way to avoid RMD rules when it comes to Inherited Roth IRAs. The good news is that you may be able to rollover your Roth 401k to a Roth IRA and voilà that account avoids RMDs while the account owner is alive.
In the case of my sibling, he is a sole proprietor with a Solo/Individual Roth 401k. He would not “cry uncle” until I sent him the following email.
It was good to talk with you on the phone last night. I want to follow up on the discussion we had regarding RMDs and Roth accounts. Since I am not licensed to practice tax law, I am providing the below quote from the IRS website. I have underlined it so you don’t miss those important sentences.
What types of retirement plans require minimum distributions?
The RMD rules apply to all employer sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.
The RMD rules also apply to Roth 401(k) accounts. However, the RMD rules do not apply to Roth IRAs while the owner is alive.
I hope this helps and thanks for keeping me on my toes.