By Ian Berger, JD
IRA Analyst
If you have both pre-tax and Roth accounts in a 401(k) (or a 403(b) or governmental 457(b)) and are subject to required minimum distributions (RMDs), be aware of new rule changes made in the 2022 SECURE 2.0 law. The rules were clarified in the IRS RMD final regulations, which came out on July 18.
Starting with RMDs for 2024, Roth plan accounts can be disregarded when your RMD is calculated. (Roth IRAs have always been exempt from lifetime RMDs.) Many of you won’t be affected by this change while you’re still working because you can use the “still-working exception” to defer RMDs until retirement. But those who can’t use that exception (because you own more than 5% of the company where you work or your plan doesn’t offer the exception) will be affected once RMDs kick in – generally in the year you turn 73.
The new rule will also affect you if you have a Roth plan account and retire on or after 2024 in a year when RMDs are due and you want to roll over your 401(k) to an IRA. When that happens, the RMD due from the plan for the year of retirement must be paid before any funds can go to the IRA. With this new SECURE 2.0 change, the prior-year 12/31 value of your Roth accounts can be disregarded when your year-of-retirement RMD is calculated.
Example: Simone, age 75, is employed by Gymnastics Clubs of America. She has been participating in the company’s 401(k) and has pre-tax and Roth dollars there. Simone has never owned more than 5% of GCA, so she has been using the still-working exception to delay RMDs until her retirement. On September 1, 2024, Simone retires from GCA and wants to roll over her entire 401(k) to Roth and traditional IRAs. Simone can do the rollovers, but she must first receive her RMD for 2024. This RMD will calculated without considering her Roth plan dollars.
Another part of the new regulations confirms that a withdrawal from a Roth 401(k) account in a year an RMD is required does not count towards satisfying your RMD for that year. This is not surprising since Roth dollars are after-tax. Plan RMDs can only be satisfied with distributions from the taxable portion of your plan.
What is surprising is a new rule in the final regs that may impact your beneficiaries if you have both pre-tax and Roth plan accounts. If a plan participant (or IRA owner) dies on or after her required beginning date (RBD) for starting RMDs, beneficiaries subject to the 10-year payout rule must also take annual RMDs during that 10-year term.
Beneficiaries subject to the 10-year rule who inherit both traditional and Roth IRAs from an IRA owner who dies on or after the owner’s RBD only have to take annual RMDs on the traditional IRAs. That’s because Roth IRA owners are always considered to have died before their RBD.
This ability to separate pre-tax from Roth is not allowed when a 401(k) participant with both pre-tax and Roth accounts dies. The IRS says the RBD for the Roth accounts is the same as the RBD for the pre-tax accounts. So, if you die on or after your RBD, any 401(k) beneficiary subject to the 10-year rule must take annual RMDs on your entire inherited account, including the Roth funds.