The IRS has released final regulations impacting taxpayers subject to the “10-year rule” for required minimum distributions (RMDs) from inherited IRAs or other defined contribution plans. These regulations, effective in 2025, mandate that many beneficiaries take annual RMDs over the 10 years following the account holder’s death.
SECURE Act and the End of Stretch IRAs
The roots of these new regulations trace back to the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act. This law eliminated the so-called “stretch IRAs,” which allowed beneficiaries to extend RMDs over their entire lifetimes. Younger heirs particularly benefited from this provision, as it enabled them to defer taxes and allow the accounts to grow.
The SECURE Act created limitations on which heirs can stretch IRAs. These limits are intended to force beneficiaries to take distributions and expedite the collection of taxes. Specifically, for IRA owners or defined contribution plan participants who died in 2020 or later, only “eligible designated beneficiaries” (EDB) are permitted to stretch out payments over their life expectancies. The following heirs are considered eligible for this favorable treatment:
- Surviving spouses
- Children under the age of majority
- Individuals with disabilities
- Chronically ill individuals
- Individuals no more than 10 years younger than the account owner
All other heirs, referred to as designated beneficiaries, must withdraw the entire account balance within 10 years of the account holder’s death, regardless of whether the account holder died before, on, or after the required beginning date (RBD) of their RMDs.
Note: In 2023, under another law, the age at which account owners must begin taking RMDs increased from 72 to 73, pushing the RBD date to April 1 of the year after the account owner turns 73. The age is slated to jump to 75 in 2033.
Proposed Regulations and Subsequent Clarifications
In February 2022, the IRS proposed regulations regarding the 10-year rule, which introduced a requirement for designated beneficiaries to take taxable RMDs annually for the first nine years, with the remaining balance to be withdrawn in the tenth year if the account holder died on or after their RBD. This proposal caused confusion among taxpayers, prompting the IRS to issue waivers on enforcement until the final regulations were released.
Final Regulations Clarified
The final regulations stipulate that if the deceased began taking RMDs before their death, designated beneficiaries must continue to take annual distributions over the 10-year period. However, if the deceased had not begun taking RMDs, the beneficiaries can choose when to take distributions within the 10-year period, providing more flexibility for tax planning.
For example, if a beneficiary inherited an IRA in 2021 from someone who had started taking RMDs, they would not need to take RMDs for 2022 through 2024 under the waivers. However, they must take annual RMDs from 2025 through 2030 and fully distribute the account by the end of 2031. If the deceased had not begun taking RMDs, the beneficiary could decide not to take any distributions until closer to 2031, as long as the account is fully liquidated by the end of that year.
Additional Proposed Regulations
The IRS has also proposed regulations related to other RMD changes introduced by SECURE 2.0, including the age at which individuals born in 1959 must begin taking RMDs, which is set at 73 years. These regulations also address:
- Annuity purchases with part of an employee’s defined contribution plan
- Distributions from designated Roth accounts
- Corrective distributions
- Spousal elections after a participant’s death
- Divorce after the purchase of a qualifying longevity annuity contract
- Distributions to a trust beneficiary
These proposed regulations are expected to take effect in 2025.
Timing and Tax Planning
Even though RMDs from an inherited IRA may not yet be required, beneficiaries should consider taking distributions to optimize their tax situations. If you have inherited an IRA or a defined contribution plan and are uncertain about your RMD requirements, contact us for guidance on the best course of action.
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