In mid-July, the IRS issued its final required minimum distribution (RMD) regulations under the 2020 SECURE Act. The 260 pages of final regulations saw some fine-tuning and elimination of certain elements but kept the majority of the 2022 proposed regulations intact, including one that has generated some controversy. This rule is known as the “10 Year Rule” and applies to most non-spouse beneficiaries of inherited retirement accounts.
Here’s what you need to know.
Key Changes to RMD Rules
- New rules: Before the SECURE Act was passed, withdrawals from inherited IRAs could be stretched out over the course of the beneficiary’s life. That is no more. Now, most non-spouse beneficiaries of inherited traditional IRAs must withdraw all funds from the account within a 10-year period. This rule applies only to those accounts whose original holder passed away in 2020 or later.
- If the account holder passed away before they took RMDs: Under the finalized rule, if a person inherits a traditional IRA from someone who died before the account holder was taking RMDs, then the beneficiary of that account has the flexibility to take the money out at any time and at any rate during the 10-year period.
- Example: Karen inherited a traditional IRA from her mother Linda, who died at age 65 in 2022 and did not begin to take RMDs before she passed. Under the SECURE Act, Karen is subject to the 10-year rule. She has the ability to choose whether to take the money out all at once or spread it out over time, as long as the inherited IRA account is emptied by December 31, 2032.
- If the account holder passed away while taking RMDs: If the account holder died on or after their required beginning date for taking RMDs, then annual RMD payments must continue to the beneficiary during the 10-year period. This is because of the “at least as rapidly rule” (ALAR), meaning that beneficiaries will have to continue taking annual RMDs of at least the amount the previous owner was taking. At the end of the 10th year, any remaining assets would be distributed in full.
- Example: Bob inherited a traditional IRA from his father Steve, who died at age 85 in 2020. Steve was taking RMDs before he passed. Under the SECURE Act, Bob is subject to the 10-year rule and must continue taking RMDs of at least the same amount his father was before he passed. Bob can increase the amount of the RMD if he wishes to. All money must be emptied from the account by December 31, 2030. Due to the IRS waiver of the penalties for missed RMDs in years 2021, 2022, 2023, and 2024, Bob does not need to backtrack and take RMDs for those years.
- Roth IRAs: Most non-spouse beneficiaries of inherited Roth IRAs are also subject to the 10-year rule, but no distributions are required 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.
This rule will go into effect starting in 2025. The IRS will not impose penalties for annual RMDs that were not taken for years before 2025.
Sources:
https://irahelp.com/slottreport/irs-issues-final-secure-act-regulations-controversial-annual-rmd-requirement-during-10-year-rule-stands/
https://www.federalregister.gov/documents/2024/07/19/2024-14542/required-minimum-distributions
https://www.bonadio.com/article/irs-issues-final-regulations-on-required-minimum-distributions-for-inherited-retirement-accounts/
Disclaimer: The information contained in this presentation is not written or intended as financial, tax, legal or accounting advice. This material has been prepared for educational purposes only as of the date of writing, by sources believed reliable, and may change at any time based on economic, market, policy, or other conditions and may not come to pass.