By Andy Ives, CFP®, AIF®
IRA Analyst
QUESTION:
I have been getting emails from a few sites pitching their subscriptions. They claim that Roth IRAs will all be taxable in the future. They say there are things you can do to avoid these taxes, but to find out what they are you have to subscribe to their newsletter. Is this true, and if so, how can one avoid taxes for Roth IRAs?
ANSWER:
Spam emails like you are referring to are oftentimes nothing more than shady sales pitches preying on fear. Don’t believe their false hype, and certainly don’t hand over any of your hard-earned dollars to these organizations. There are no guarantees as to what might happen in the future. However, despite what anyone says, we don’t think Roth IRAs will be taxable, for a multitude of reasons. For one, Congress loves Roth IRAs, because they generate tax revenue immediately. Why else would they recently create Roth SEP accounts and Roth SIMPLE plans? More Roth options mean more tax revenue now. Also, it would be politically risky to tax Roth IRAs since it would be seen as Congress reneging on their promise of a tax-free retirement savings account. So, when we look beyond the noise, all indicators say tax-free Roth accounts are here to stay.
QUESTION:
I inherited an IRA from my sister in 2008, so I take required minimum distributions (RMDs) based on the old (pre-SECURE Act) rules. I anticipate my children inheriting the remainder of the inherited IRA in the future. Will they be subject to the new 10-year RMD rules?
Thank you,
Bettilou
ANSWER:
Bettilou,
When your children inherit your inherited IRA, they will be “successor beneficiaries.” As successor beneficiaries, you are correct that they will receive the 10-year payout rule. Since you are operating under the old rules and taking annual “stretch” RMDs, the successor beneficiary rules dictate that your children must also continue those payments. They will essentially “step into your shoes” and continue with the same RMD factor that you are using, minus 1 each year, for years 1 – 9. (They will not use their own life expectancies.) They will also have the added layer of the 10-year rule, so whatever remains in the account at the end of year 10 must be distributed.