The IRS has released new statutes about required minimum distributions (RMDs) from inherited IRAs or other retirement accounts. The final regulations, which take effect in 2025, require many beneficiaries to take RMDs every year for ten years after the account holder’s passing.
SECURE Act Limits Stretch IRAs for Most Beneficiaries
These changes stem from the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act, which eliminated stretch IRAs for most beneficiaries. Before the SECURE Act, all beneficiaries could spread RMDs over their lifetimes, allowing for smaller distributions and extended tax deferral. Now, only eligible designated beneficiaries (EDBs) such as surviving spouses, minor children, individuals with disabilities or chronic illnesses, and those within ten years of the account owner's age retain this option. Other designated beneficiaries must withdraw the entire account balance within ten years. In 2023, the age to start RMDs increased from 72 to 73, with another increase to 75 planned for 2033.
Clearing the Confusion and Issuing Waivers
In February 2022, the IRS proposed new rules that required designated beneficiaries to take RMDs annually for the first nine years based on life expectancy, with the remaining balance taken in the tenth year if the account holder passed away on or after the Required Beginning Date (RBD). A single lump-sum distribution at the end of ten years would not be permitted. These regulations led to confusion regarding RMD timing, penalties for non-compliance, and potential plan disqualification. To address this, the IRS issued waivers, which will remain in effect until the final regulations take hold in 2025.
Adjusted Rules for When the Deceased Had Not Begun Taking RMDs
The rules differ slightly if the deceased had not yet started taking RMDs. While the full account balance must still be distributed within the same ten-year timeframe, there is no requirement for annual distributions, offering more flexibility for strategic tax planning.
As an example, if a beneficiary inherited an IRA in 2021 from someone who had begun RMDs, they would not need to take RMDs from 2022 through 2024 due to waivers. However, they must take RMDs annually from 2025 through 2030, with the account fully distributed by 2031. Conversely, if the deceased had not started RMDs, the beneficiary may choose not to take distributions from 2025 through 2030 as long as the account is distributed fully by 2031.
Key Changes Under SECURE 2.0
The IRS released proposed regulations related to RMD changes under SECURE 2.0, including setting the RMD start age for individuals born in 1959 at 73 years. The regulations also address annuity purchases using funds from a defined contribution plan, distributions from Roth accounts, corrective distributions, spousal elections after a participant's death, divorce after buying a qualifying longevity annuity contract, and distributions to trust beneficiaries. These regulations will become effective in 2025.
Experts in Estate Planning Services
Understanding these evolving RMD rules is critical for effective long-term financial and estate planning. Even if RMDs from an inherited IRA aren’t immediately required, beneficiaries should consider taking distributions to manage taxes efficiently and avoid potential penalties. If you’ve inherited an IRA or a defined contribution plan and need guidance on RMDs, our experts are here to help.
With over 66 years of leadership, experience, and expertise, our talented team of CPAs and advisors fully understand the nuances of estate planning. In today’s ever-changing economic landscape, we offer resources beyond the traditional audit, accounting, and tax services. We develop robust estate plans that simplify the process, minimize tax liabilities, ensure your assets are distributed according to your wishes, provide peace of mind for your loved ones across generations, and establish solid business exit strategies.
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