Required minimum distributions are one of the few parts of retirement planning you don’t get to schedule yourself. Once you reach RMD age, the IRS expects money to come out of your traditional retirement accounts every year, whether you need it or not.
Roth accounts are different. Most Roth accounts have no RMDs during the original owner’s lifetime, which means your money can stay invested for as long as you’d like. For self-directed investors holding real estate, notes, or other alternative assets, that flexibility can be especially valuable.
Here’s how RMDs work (and don’t work) for Roth accounts, and what changed recently.
Why Roth Accounts Are Treated Differently
The reason traditional accounts have RMDs comes down to taxes. Traditional IRA and 401(k) contributions are generally made with pre-tax dollars, so the IRS requires withdrawals eventually in order to collect income tax on that money.
Roth accounts work the other way around. Contributions are made with after-tax dollars, and qualified withdrawals are tax free. Since the IRS has already collected its share, there’s less reason to force the money out on a schedule.
Roth IRAs: No RMDs for the Original Owner
If you own a Roth IRA, you’re never required to take a distribution during your lifetime. You can withdraw money when you choose, in the amount you choose, or leave it untouched entirely.
This applies to self-directed Roth IRAs too. If your Roth IRA owns a rental property, a private note, or an LLC interest, there’s no annual distribution requirement pushing you to sell or distribute it. Your investments can keep working, and any growth inside a Roth can eventually come out tax free, as long as the withdrawal is qualified.
Roth 401(k)s: A Recent Change
For years, Roth 401(k) accounts had an odd quirk. Even though they’re funded with after-tax dollars like a Roth IRA, they were still subject to RMDs. Many people worked around this by rolling their Roth 401(k) into a Roth IRA before RMDs began.
That changed with the SECURE 2.0 Act. Beginning in 2024, Roth accounts within 401(k) and 403(b) plans are no longer subject to RMDs during the owner’s lifetime.
What this means for owner-only 401(k)s. If you have a solo 401(k) with both pre-tax and Roth money, keep in mind that the rule applies only to the Roth portion. The pre-tax portion of your plan still has RMDs, which need to come from that plan.
A Quick Note on Rolling a Roth 401(k) Into a Roth IRA
Even without the RMD issue, some people still prefer to consolidate a Roth 401(k) into a Roth IRA for simplicity or investment flexibility. If you’re considering it, be aware of the Roth IRA five-year rule. To take tax-free withdrawals of earnings, your Roth IRA generally needs to have been open for at least five years, and years in a Roth 401(k) don’t count toward that clock. If you already have a Roth IRA that’s been open for five years, this usually isn’t a concern.
What Happens After the Owner Passes Away
The no-RMD rule applies to the original owner. Once a Roth account is inherited, beneficiaries follow their own distribution rules. Surviving spouses often have the most flexibility, while most other beneficiaries need to empty an inherited Roth IRA within 10 years. The good news is that qualified distributions from an inherited Roth are generally still tax free.
Things to Keep in Mind
- Roth withdrawals can’t satisfy traditional RMDs. If you have both Roth and traditional accounts, taking money from your Roth doesn’t count toward the RMD on your traditional accounts.
- Taxes aren’t the only factor. Even without RMDs, a Roth account holding alternative assets still needs attention. Expenses, valuations, and investment decisions continue as usual.
- Planning for your beneficiaries still matters. Because your heirs may be on a 10-year timeline, it’s helpful to keep beneficiary designations current and make sure they understand what your account holds.
Can Roth Conversions Help Reduce Future RMDs?
Many investors ask whether moving money from a traditional IRA to a Roth IRA can reduce the RMDs they’ll face later. The short answer is that it can, and it’s a strategy worth discussing with your tax advisor.
When you convert, the amount you move is added to your taxable income for that year. In exchange, the converted money is no longer part of your traditional IRA balance, which means lower future RMDs, and it can grow inside a Roth without distribution requirements.
A few important points:
- Conversions are taxable now. You’ll owe income tax on the converted amount in the year of the conversion, so planning for that tax bill is essential.
- Conversions can’t be undone. Once completed, a Roth conversion is permanent.
- RMDs come first. If you’ve already reached RMD age, you must take your RMD for the year before converting. The RMD itself can’t be converted.
- Alternative assets can be converted. A self-directed IRA can convert assets like real estate or notes directly to a Roth IRA, based on their fair market value at the time of conversion. Accurate, well-documented valuations are important here.
Many people find the years between retirement and RMD age are a natural window to explore conversions, since their income may be lower. We’ll cover this strategy in more depth in a future article.
How MidAtlantic IRA Can Help
Whether you already have a self-directed Roth IRA or you’re exploring a conversion, our team is happy to walk you through how the process works and what paperwork is involved.
Because Roth decisions depend on your tax situation now and in the future, we always recommend talking with your CPA or financial advisor first. MidAtlantic IRA doesn’t provide tax, legal, or investment advice, but we’re glad to help you understand your options.
Curious whether a Roth fits into your plan? Schedule a call with our team and let’s talk it through.