Following years of reactions ranging from hopeful speculation to fretful foreboding, the IRS has issued final regulations to clear up uncertainty surrounding changes to required minimum distributions (RMDs) and inherited IRAs under the SECURE Act and the SECURE 2.0 Act.
IRS Settles 10-Year Rule for Inherited IRAs
Of primary interest, effective January 1, 2025, non-eligible designated beneficiaries – generally someone other than the original retirement account owner’s spouse – must take RMDs annually to satisfy the 10-year rule for withdrawals. Beneficiaries who, in hindsight, should have been taking RMDs from 2021 to 2024 don’t have to make up for these missed distributions and will not face a penalty. Crucially, those who did not take any distributions between 2021 and 2024 must now begin taking annual distributions and are required to deplete the account by the end of the 10th year following inheritance.
We have been planning around these regulations and anticipated this outcome, so our clients are prepared, and we don’t anticipate any further surprises in this area.
Additional Clarifications and Guidance
The regulations cited above are part of a 260-page document that provides extensive guidance on specific scenarios affecting eligible and non-eligible designated beneficiaries. Some of the more notable items are below:
- Roth accounts and the 10-year rule: If a participant’s entire group retirement plan balance is in a designated Roth account, non-eligible designated beneficiaries are not required to take annual RMDs during the 10-year period.
- RMD rule for surviving spouses: surviving spouses who initially elect the 10-year rule can later choose to roll over or treat the inherited account as their own.
- Undistributed RMDs in the year of death: if an individual has not fully satisfied their RMD for the year at the time of their death, their beneficiary or beneficiaries must fulfill the remaining RMD.
- Annuity and non-annuity assets: for retirement accounts holding both annuity and non-annuity assets, these can be aggregated for RMD calculations.
These final regulations and many of the others in the IRS’ latest guidance will have a significant impact on retirement account distributions and tax planning, both before and after the account owner’s death. Without question, they introduce more complexity, but also provide opportunities for strategic planning.
