When saving for retirement, ROTH accounts are becoming increasingly popular. Unlike traditional IRAs or 401k plans, while contributions to ROTH IRAs and ROTH 401k plans are not tax deductible, distributions are tax-free (so long as certain requirements are met). If you have ROTH accounts, it is important to understand Minimum Distribution Requirements as they differ from those of traditional IRAs/401ks.
ROTH IRA – Original Owner
If you are the original account owner or you inherited the IRA from your spouse, there are NO Minimum Required Distributions. Funds can remain in the account indefinitely. As long as the account was (1) opened and funded at least five years prior and (2) you have reached age 59 ½, distributions of your contributions, as well as earnings, are tax-free.
ROTH 401k -Original Owner
If you have a ROTH 401k in existence when you turn 70 ½, you are required to take Minimum Distributions, just as you would with a traditional IRA or 401k. Distributions are tax-free if the account has been in existence for at least 5 years. If not, a portion of the distribution may be taxable. However, contributions (which can always be withdrawn tax-free) are assumed to come out first.
If you have a ROTH 401k and roll it over into a ROTH IRA prior to turning 70 ½, there will not be any Minimum Required Distribution requirements. If you have funds in a 401k plan and some are designated as ROTH contributions and some as traditional contributions, it is recommended that you roll the entire account over into IRAs (the ROTH 401k contributions and associated earnings would go into a ROTH IRA and the traditional 401k contributions and earnings would go into a traditional IRA). You cannot choose to just roll over the ROTH portion into an IRA and leave the traditional portion in the 401k. Alternatively, if you leave the funds in a 401k when you go to take distributions, a portion of each distribution would be taxable and a portion would be tax-free.
When doing a rollover from a ROTH 401k plan to a ROTH IRA, the 5-year holding period begins when the receiving ROTH IRA is established – it does not matter how long contributions had been made to a ROTH 401k. Therefore, if you have a ROTH 401k and are thinking of eventually doing a rollover, you will want to set your ROTH IRA up and make a contribution to it as soon as possible so that the 5-year clock can begin.
Inherited ROTH IRA or ROTH 401k (by someone other than a spouse)
As with inherited traditional IRAs or 401ks, distributions must be taken over the beneficiary’s life expectancy or within 5 years of death. If the account had not been in existence for 5 years prior to the original account owner’s date of death, some of the distributions may be taxable. However, it is assumed that contributions come out first and contributions are not taxable – they can be withdrawn at any time without penalty – it is the earnings portion that could potentially be taxed if the holding period rules are not met.
As you can see, ROTH IRA distribution rules can be quite complicated, for both owners and beneficiaries. Understanding what is required and the tax consequences of those requirements are critical.
