Jean Folger has 15+ years of experience as a financial writer covering real estate, investing, active trading, the economy, and retirement planning. She is the co-founder of PowerZone Trading, a company that has provided programming, consulting, and strategy development services to active traders and investors since 2004.
Updated May 25, 2023 Fact checked by Fact checked by Vikki VelasquezVikki Velasquez is a researcher and writer who has managed, coordinated, and directed various community and nonprofit organizations. She has conducted in-depth research on social and economic issues and has also revised and edited educational materials for the Greater Richmond area.
Part of the Series What 50-Year-Olds Need To Know About Roth IRAsWhat You Need to Know About Roth IRAs
At some point, all individual retirement accounts (IRAs) must have their balances distributed to the account owner or the owner’s beneficiaries. This includes both Roth and traditional. A key difference between the two types of IRAs is that you don’t have to take any distributions from a Roth IRA during your lifetime if you are the original owner.
Required minimum distributions (RMDs) represent the minimum amount of money that you must take out of your retirement account each year after reaching a certain age. That amount is specified by the Internal Revenue Service (IRS) and, in the case of traditional IRAs, the withdrawal will be taxed as income at your current tax rate. The IRS also imposes a 50% penalty on any missed RMDs.
You must begin taking RMDs from a traditional IRA by April 1 of the year after you turn 73 as of Jan. 1, 2023. The old threshold still applies if you were 72 in 2022. You must take them even if you don’t need the money for living expenses. The amount of your RMD is based on your prior year’s account balance (as of Dec. 31) and your age at the time. Many other types of retirement accounts, including 401(k) plans, follow a similar set of rules. You must almost always pay income taxes on those withdrawals.
One of the great advantages of Roth IRAs is that they are not subject to the same RMD rules. If you have a Roth IRA, you don’t have to take RMDs from it during your lifetime. So if you don’t need the money, you can leave the funds untouched and let the account grow tax-free (possibly for decades) for your heirs. Your beneficiaries—other than a surviving spouse—must take RMDs from your account after they inherit it.
When you leave a Roth IRA to your beneficiaries, they—unlike you—generally will have to take RMDs from the account. They also will face a 50% penalty (or excise tax) if they don’t take the distributions as required.
Congress lowered the missed withdrawal penalty when the SECURE Act 2.0 was passed in Dec. 2022. As of Jan. 1, 2023, the penalty is 25% of the value of the withdrawal. This fine can be lowered to 10% if the mistake is fixed before the date that the penalty is imposed.
The rules differ depending on whether a spouse or a different beneficiary inherits the Roth. So it pays to understand the rules—and make sure your beneficiaries do as well.
If you're the spouse of the IRA holder, consider doing a spousal transfer and treat the account as your own. You transfer the assets into your own Roth IRA. This can be an existing one or a new account. Keep in mind that you’re subject to the same distribution rules as the original account holder. Note that you can do this only if you are the sole beneficiary on the account.
You can also open an inherited IRA using the life expectancy method or the 10-year method. Here's how they work:
Another option is to choose to take a lump-sum distribution. When you take the lump-sum option, the Roth IRA assets are distributed to you all at once. If the account was less than five years old when your spouse passed away, then the earnings will be taxable.
A non-spouse who inherits a Roth IRA once had similar options to those above (except for the treat-as-your-own spousal transfer). But the Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in Dec. 2019, changed all that for account holders who died after Dec. 31, 2019.
Under the law, beneficiaries are either eligible designated beneficiaries, designated beneficiaries, or non-designated beneficiaries.
An eligible designated beneficiary can be a
They are all allowed to take distributions over their remaining life expectancy—except for minors, who can start out using their life expectancy but must switch to the 10-year method once they reach the age of majority (which varies by state). Beneficiaries figure out their life expectancy by using the tables and worksheets in IRS Publication 590-B.
Designated beneficiaries must withdraw all the money by the end of 10 years, while non-designated beneficiaries (often an entity such as a trust or charity) must withdraw it by the end of five years.
Yes, designated Roth 401(k) accounts, as they are called, are subject to required minimum distributions starting at age 73 if they reached that age as of Jan. 1, 2023. The old threshold still applies if the account holder was 72 as of 2022. These ages apply unless the account owner is still working. But because they are Roth accounts, you don’t owe taxes on the RMDs. What you lose is that money’s ability to continue to grow tax-free within the account.
The RMD rules for designated Roth accounts in a 401(k) or 403(b) only apply for 2022 and 2023. For 2024 and after, RMDs are no longer required from designated Roth accounts. Note that 2023 RMDs due by April 1, 2024, are still required.
No, as long as the account owner has had a Roth account for at least five years (the five-year rule), all distributions are tax-free. Even before that, withdrawals of contributions (but not account earnings) will be tax-free. That’s because they have already been taxed.
The financial institution where your Roth IRA is held (the custodian) can supply you with forms to designate your beneficiaries. You may want to name both a primary beneficiary (or beneficiaries) and contingent beneficiaries in case you outlive your primary beneficiaries. You also should review your beneficiary designations periodically and update them as necessary.
A Roth IRA can be an excellent wealth transfer vehicle because you don’t have to draw down the account during your lifetime, and distributions are generally tax-free for your heirs.
One challenge with Roth IRAs is that your beneficiaries may not be aware of the RMD rules. So, if you have a Roth IRA, do your beneficiaries a favor: Let them know the basics about distributions—or they’ll get a costly lesson later when they’re hit with a 50% penalty on the amounts they should have withdrawn. As long as everyone understands the rules, you and your heirs can enjoy years of tax-free growth and tax-free income from your Roth IRA.