RMDs – Round 2

Welcome back M.O.U.S.E.(rs)! If you don’t know why I’m calling you a M.O.U.S.E, see my blog of November 15. It appears this most recent offering caused a lot of discussions, which is what I was hoping for!

A shout out to Tax School friend Roberta Wajrowski, CPA from Crystal Lake IL who reminded me that the IRS has updated RMD tables for 2022 and later. These revised tables are updated for the Uniform Lifetime Table, Single Life Expectancy (Table I), and the Joint Life and Last Survivor Expectancy (Table II). Unfortunately, the IRS website resources are not yet updated for these changes so I’m linking you to a discussion and examples for the revised tables as provided by Ed Slott and Company, LLC. While not substantial authority, they do a good job of explaining how the new tables will work for your clients.

NOTE: The revised tables are not required until RMDs are made in 2022. For RMDs your clients take (or still need to take) in 2021 (about five weeks left my friends!) you use the existing tables. I expect this is why the IRS direct resources are not yet updated with the new tables.

My second M.O.U.S.E.(r) shout out goes to Greg Johnson from our Facebook group who asks:

“Inherited Roth IRAs for Decedent after December 31, 2019 – Not a Designated Beneficiary or Eligible Designated Beneficiary such as an estate. …does an Inherited Roth IRA require to use the 5 yr. rule and thus has to take RMD payments each year or must it just have the assets distributed within 5 years?”

The answer, per the IRS, is exactly as Greg surmised:

Inherited ROTH IRAs

Generally, the entire interest in a Roth IRA must be distributed by the end of the fifth calendar year after the year of the owner’s death unless the interest is payable to a designated beneficiary over the life or life expectancy of the designated beneficiary.

If paid as an annuity, the entire interest must be payable over a period not greater than the designated beneficiary’s life expectancy and distributions must begin before the end of the calendar year following the year of death. Distributions from another Roth IRA cannot be substituted for these distributions unless the other Roth IRA was inherited from the same decedent.

If the sole beneficiary is the spouse, he or she can either delay distributions until the decedent would have reached age 70½ or treat the Roth IRA as his or her own.

Well, Greg gets a second shout out for an additional Facebook question which was equally intriguing:

“May the estate transfer the Inherited Roth IRA to a sole beneficiary of the estate as her individual inherited Roth IRA subject to the 5-year rule from the decedent’s date of death?”

My first thought is why do we care about ROTH IRA distributions? Aren’t they tax-free? The answer revolves around the notion of qualified ROTH distributions. The IRS has a definition and even a flow chart for us:

What Are Qualified Distributions From a Roth IRA?

A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

1. It is made after the 5-year period beginning with the first tax year for which a contribution was made to a Roth IRA set up for your benefit.
2. The payment or distribution is:
   1. Made on or after the date you reach age 59½,
   2. Made because you are disabled (defined earlier),
   3. Made to a beneficiary or to your estate after your death, or
   4. One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $ 10,000-lifetime limit).

Now, to the second part of Greg’s question: Can the estate distribute the ROTH IRA to the sole beneficiary of the estate to treat as their own. By your question Greg and the statement from your first question indicating that the beneficiary is not a designated nor eligible designated beneficiary, I will assume the beneficiary, therefore, is not the decedent’s spouse. If my assumption is true, then either the estate or the sole beneficiary will be subject to the 5-year rule. In either case, the estate or the beneficiary could have also chosen a lump sum. Only an eligible designated beneficiary, such as a spouse, would have the option to treat the inherited ROTH IRA as their own.

See IRS Publication 590-b for more information.

Keep thinking, keep asking and keep being the M.O.U.S.E. for your clients.

Thanks, friends. I wish a peaceful Thanksgiving to one and all….

Tom O’Saben, EA