By Sarah Brenner, JD
Director of Retirement Education
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There seems to be a lot of conflicting information on Inherited Roth IRAs, for which I was hoping to get a definitive answer from the experts.
My understanding was that a non-spouse beneficiary (who is not an eligible designated beneficiary), who inherits a Roth IRA wouldn’t be subject to annual RMDs but would be subject to emptying the account within 10 years of the original account owner’s death (for account owners who died after 2019, that is). I thought this exception was predicated on the original account owner of a Roth IRA not being subject to a required beginning date (RBD).
…..however, I have seen multiple articles online (perhaps incorrect) which suggest that non-spouse beneficiaries of Roth IRAs are actually subject to RMDs for years 1-9 and must then empty the account by year 10.
Any help/insight you could provide would be greatly appreciated.
You are correct that there has been a lot of confusion about the rules for inherited IRAs subject to the 10-year rule in the wake of the IRS proposed regulations released in 2022. These proposed regulations surprisingly required annual required minimum distributions (RMDs) from inherited IRAs subject to the 10-year rule when an IRA owner dies on or after his required beginning date.
Roth IRAs are not subject to this requirement. Because Roth IRA owners do not have to take RMDs during their lifetime, they never reach their required beginning date (RBD). They are always considered to die before their RBD. Therefore, annual RMDs are never required during the 10-year payout period for inherited Roth IRAs.
Because of my high income, I annually do a back door Roth IRA contribution. Since I have no IRAs at end of year, 100% of my conversion is tax free.
In 2021, I did some freelance work and contributed $10,000 into a SEP-IRA in 2022, where it sits now.
As result, is my 2022 IRA backdoor going to be 100% taxable? How can I get back to tax-free conversions?
It sounds like you have run into the pro-rata formula. This rule requires you to determine the taxation of any distribution, including a conversion, by looking at the total balance of all your IRAs and what percentage is taxable. The pro-rata rule does include SEPs in the overall balance. This means that your back-door Roth IRA conversions will be partially taxable.
To avoid future issues with the pro-rata formula, your options are limited. You might consider rolling over the SEP funds to a workplace plan if that is possible. Reverse rollovers from an IRA to a plan can only be done with taxable funds and are an exception to the pro-rata rule.