Alas, the IRS issued SECURE Act Final Regulations July 18, 2024, for more definitive guidance on the required minimum distribution (RMD) rules for retirement accounts inherited after 2019. That said, all 260 pages of the Final Regulations don’t make the rules any simpler.
The Secure Act
The SECURE Act passed in 2019 radically changed the RMD rules on inherited retirement accounts. The biggest change was to eliminate the lifetime “stretch” treatment that beneficiaries had. Most non-spouse beneficiaries are now subject to a 10-year rule, which significantly accelerates the cash they receive and the related tax hit. The Act also added another class of beneficiaries called eligible designated beneficiaries (spouse, under-age-21 child of IRA owner, disabled or chronically ill individual, beneficiary not more than 10 years younger than IRA owner). These beneficiaries are still eligible for lifetime RMDs if they want. The 10-year also doesn’t apply if the IRA owner hadn’t yet reached their retirement beginning date to start taking RMDs prior to death.
The rules were complicated before the SECURE Act and became even more complex for retirement accounts inherited after 2019. Add to that, the new rules are in addition to the old rules, not instead of!! It’s hard for industry professionals to keep a grasp on it, let alone the individuals subject to the rules!
In early 2022, the IRS issued Proposed Regulations that added another major change. If the account is inherited by someone who was subject to RMDs during their own lifetime, the beneficiary who is subject to the 10-year rule also has to take lifetime RMDs during the 10-year period. The remaining balance still has to be fully distributed at the end of the 10th year after the original owner’s death. The earliest this could apply would be the 2021 tax year for deaths in 2020. But 2021 had already passed. The 2022 Proposed Regulations waived penalties for any of these lifetime RMDs not taken in 2021 (but of course!) or 2022. The IRS continued to delay the effective date by issuing notices that similarly waived penalties for 2023 and 2024.
The Final Regulations confirm this is now the rule and it’s effective for 2025. It also confirmed that the missed RMDs don’t need to be made up and this doesn’t extend the 10-year period. For instance, if someone who was subject to RMDs during life died in 2023, the inherited IRA beneficiary’s first lifetime RMD would be in 2024. However, the Final Regulations have provided that the RMDs don’t need to start until 2025. The balance has to be fully distributed by 12/31/33. Remember, the RMDs set the minimum amount to be distributed over the 10-year period, but the beneficiary can take more. This is where tax planning comes in to see what makes sense for their situation.
Roth IRAs are subject to the 10-year rule, but not the lifetime RMD rule because Roth IRAs are not subject to RMDs during life. The beneficiary could wait until the end of the 10th year to maximize the tax-free compounding.
The Final Regulations
The Final Regulations provide regulatory guidance on other matters that will be discussed further in subsequent articles:
- How original account owner year-of-death RMDs should be handled.
- Providing no annual RMDs are required during the 10-year period if the inherited 401(k) plan balance was 100% in a Roth account (putting it on same playing field as inherited Roth IRAs).
- A new “Hypothetical RMD” that applies when surviving spouses elect the 10-year rule but switch to rolling it over or treat it as their own.
- Providing clarification on successor beneficiary rules (beneficiary of the beneficiary) as to whether they start a new 10-year period or finish out the original beneficiary’s 10-year period.
- Rulings and clarifications for situations where a trust is beneficiary of a retirement account.
- Clarification of how RMDs from IRAs holding non-annuity assets and annuity assets are handled.
While they were at it, the IRS also issued SECURE 2.0 Act Proposed Regulations. There was confusion in the original SECURE 2.0 Act on the RMD starting age for individuals born in 1959. The Proposed Regulations clarify that the RMD age is age 73 for those born in 1959. There are also additional provisions related to surviving spouses who elect to be treated as the decedent for RMD purposes, with some differences.
If you inherited a retirement account, please reach out to your tax advisor or our knowledgeable team for guidance on how to navigate these rules. There are penalties for missed RMDs. It’s also important to be cognizant of these rules when naming your own retirement account beneficiaries.
The Bonadio Group’s Estate & Trust team has years of advisory and tax experience. If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
