Q: If I’m still working at 70½, do I have to take money out of my Roth IRA? I plan to work until I’m 75.–A reader in Aventura, Fla.
A: Good news: Owners of Roth IRAs do not have to take required minimum distributions (RMDs). Never, even if they are past 70½, the age at which withdrawals must begin from traditional IRAs.
“There are no RMDs because the IRS has no incentive for you to take it out,” says Cameron J. Penney, a certified financial planner in Houston. You contributed money on which you had already paid tax, so the money isn’t taxed on the way out.
The situation is reversed with traditional IRAs, which are funded with pre-tax contributions. Uncle Sam requires savers starting at age 70½ to take annual RMDs, which are counted as taxable income, as a way for the government to finally get its share. Distributions from traditional IRAs are required whether the saver is working or not.
Unfortunately, tax law doesn’t allow taxpayers to avoid the tax hit by converting the RMD from their traditional IRA into a new Roth IRA. Note, though, that if you are still working in your seventies, you can continue to contribute to a Roth.
The rules concerning RMDs for older workers are a bit different for 401(k)s and other employer-sponsored retirement plans. People with these plans who are still working at age 70½ can typically delay their RMDs, as long as they do not own 5% or more of the business they work for and the plan allows it.
The rules for Roth IRAs change after the original owner dies. If the sole beneficiary is a spouse, he or she can generally continue using the account as a Roth, without minimum distribution requirements. Another option for a spouse beneficiary would be to roll over the inherited Roth IRA into his or her own Roth IRA, a move that also wouldn’t trigger minimum distribution requirements.
However, if the beneficiary is not a spouse, the person who inherits the Roth IRA must begin to draw down the funds according to a certain formula. The government doesn’t want the Roth to grow tax-free forever. “At some point, they want the account to dwindle down,” says Jean-Luc Bourdon, a certified public accountant in Santa Barbara and a member of the AICPA’s personal financial planning executive committee.