The Internal Revenue Service (IRS) released final regulations and guidance on updated required minimum distribution (RMD) rules. These rules were proposed in the Consolidated Appropriations Act that was signed into law in early 2023. Dubbed “SECURE 2.0”, this law made changes impacting retirement plan participants, IRA owners, and beneficiaries.
For many, these proposed rules generated more questions than answers and required further public input. This confusion led to the IRS suspending the implementation of these rules until further clarification could be provided. Recently, final regulations were released by the IRS and will apply on January 1, 2025.
The 10-Year Rule for Inherited RMDs
Certain beneficiaries of inherited individual retirement accounts are required to withdraw assets within 10 years of the account owner’s death. The IRS recently clarified the types of beneficiaries that are beholden to this rule and those that are exempt. Even though distributions were not required from 2021 to 2024, the 10-year clock still starts the year after death with the first RMD to be taken on January 1, 2025. We have distilled a few of the highlights below.
- Non-eligible designated beneficiaries (non-spouse) who inherit a retirement account from someone who died prior to their Required Beginning Date are subject to the 10-Year Rule. No annual distribution is required; the retirement account must be fully distributed by the end of the 10th year after death.
- Non-eligible designated beneficiaries (non-spouse) who inherit a retirement account from someone who died on or after their Required Beginning Date are subject to both the 10-Year Rule and the Stretch Rules. A minimum distribution is required each year and fully distributed by the end of the 10th year after death.
- Eligible designated beneficiaries (surviving spouse) who inherited a retirement account from a spouse who died prior to their Required Beginning Date are subject to the stretch or 10-year rules. If a surviving spouse elects the 10-year rule and later switches (the final regulations eliminate previous deadlines) to stretch rules, retroactive Hypothetical RMDs will apply.
- Eligible designated beneficiaries (surviving spouse) who inherited a retirement account from a spouse who died on or after their Required Beginning Date are subject to the stretch rules over the longer of the beneficiary or decedent’s life.
Exempt beneficiaries include:
- The account owner’s surviving spouse
- A child of the account owner (under 21)
- A disabled or chronically ill person
- A person who is no more than 10 years younger than the account owner
RMDs for inherited Roth iras
Inherited Roth IRA beneficiaries are still subject to the 10-year rule, but you never have to take years one through nine RMDS, regardless of the decedent’s age. The assets must be fully distributed by the end of the 10th year after death. If you don’t need the money, you may wish to leave the funds in your Roth IRA for as long as possible to grow tax-free. Our financial planning team can model scenarios within your financial plan to determine the best strategy for you and your family.
Additional RMD Changes
Applicable RMD Age Changes
Under SECURE 2.0, the normal RMD age was increased from age 72 to age 73 and 75.
If you reached age 73 in 2023, your first RMD was due by April 1, 2023, based on your account balance on December 31, 2021. Your second RMD is due by December 31, 2023, based on your account balance on December 31, 2022.
Year of Death RMDs
If a retirement account owner dies before taking their RMD for the year, the beneficiary is responsible for taking the remaining amount.
An undistributed year of death RMD can now be satisfied by multiple beneficiaries in any proportion. Beneficiaries can now collectively distribute the appropriate amount without needing to match their share of the inherited account.
A special rule applies to IRA owners with multiple IRAs and different beneficiaries. The remaining year of death RMD must be taken proportionately from each IRA based on prior year-end values.
Next Steps
Since 2023, we have been working with clients to consider and model how these new rules affect their financial plans. It is important to note again that these provisions officially go into effect on January 1, 2025. If you have any questions about your personal financial plan or tax plan, contact us at 610-709-5072.