If you inherit a Roth individual retirement account (“Roth IRA”), you must take required minimum distributions (“RMD”)from the Roth IRA each year after the death of the owner. The RMD is calculated based upon the beneficiary’s life expectancy or 5 years.
To calculate RMDs for a “regular” IRA, if the owner dies PRIOR to age 70 1/2 (the normal required beginning date (“RBD”)), then RMDs must be distributed either over 5 years or the beneficiary’s life expectancy. If the owner dies AFTER the RBD, then RMDs will be distributed over the longer of the owner or the beneficiary’s life expectancy.
While Roth IRA RMDs are income tax free, you can incur penalties if you forget to take the RMD. In Letter Number 2016-0071, the Department of the Treasury responded to a request for information. The beneficiary did not take the RMD from the inherited Roth IRA. The beneficiary asked whether the failure to take the RMD made the beneficiary’s life expectancy rule inapplicable and required the Roth to be distributed over 5 years.
Assume Fred is 80 years old at his death. He has named, as beneficiary of his $1million Roth IRA, his daughter, Betty. Betty is age 58 when she is required to start taking RMDs. Betty can use her life expectancy of 27 years to begin taking RMDs. In the first year, she must take a RMD of 1/27 or $37,037 . If Betty does not use her life expectancy, then she must use the 5 year payout and take the $1million over 5 years. What if Betty uses her life expectancy and forgets to take the RMD of $37,037?
This letter advised the beneficiary that the failure to take the RMD does NOT change the life expectancy rule BUT the beneficiary could be responsible for a 50% penalty unless the IRS waives such penalty. Thus, Betty could be liable for a $18,518.50 penalty! A letter requesting the waiver of this penalty and the reasons for the failure to take the RMD, can be attached to Form 5329.
ADVICE: If you have inherited ANY IRA, then take the RMD for each year. You do NOT want to incur the 50% penalty. If you do forget and incur such a penalty, then look at Publication 590-Band Form 5329 for the procedure to have the penalty waived.