IRS Finalizes Beneficiary RMD & 10-Year Rule on Inherited IRA
The IRS recently released final regulations for inherited IRAs, clarifying and reaffirming controversial rules around required minimum distributions (RMDs). Simultaneously, the agency offered temporary relief for particular beneficiaries by delaying final RMD rules and waiving penalties for missed distributions in 2024.
What is the 10-Year RMD Rule, and How Does It Work?
The SECURE Act of 2019 introduced a 10-year rule for most non-spouse beneficiaries, requiring them to empty inherited accounts within ten years of the original owner’s death.
Two Scenarios: The IRS regulations create two distinct situations:
- Passed Before January 1, 2020: If the original owner hasn’t yet reached the age for RMDs, beneficiaries can choose to distribute the assets over their lifetime or within five years.
- Passed in 2020 and Beyond: If the original owner has already reached their RMD age, beneficiaries must take annual IRA RMDs, and the inherited account needs to be depleted by the end of the 10-year period. If the original owner has not started RMD, the beneficiary must deplete the inherited IRA within 10 years. Certain eligible designated beneficiaries may extend beyond the new 10-year rule. They are:
- IRA account owner’s spouse
- IRA account owner’s minor child (10-year rule starts after they reach the age of majority)
- Individual beneficiaries not 10 years younger than the IRA account owner
- Disabled beneficiary defined by IRS
- Chronically ill beneficiary defined by IRS
However, the requirement for annual RMDs in the second scenario has been a source of contention, as it wasn’t explicitly stated in the SECURE Act. Many financial professionals and accountants advised clients that they did not need to take annual distributions as long as the inherited retirement account was depleted by the end of the 10-year period.
Knowledge is Confidence!
Temporary Relief and Final Rules
- Delayed Implementation: Recognizing the rules’ confusion, the final IRS proposed regulation has been delayed until 2025.
- Penalty Waivers: Penalties for missing RMDs from certain inherited IRAs in 2021, 2022, 2023, and 2024 have been waived. This applies to situations where the original owner was already subject to RMDs.
- Final Regulations (2025 Onward): While the annual RMD requirement won’t be retroactive, beneficiaries of post-RMD IRAs must adhere to it starting in 2025. The 10-year rule remains in effect for all inherited IRAs after 2019.
What Should IRA Beneficiaries Know About Future RMDs Rules for Inherited IRAs?
- Review Your Situation: If you inherited an IRA, it’s crucial to understand whether the original IRA owner was taking RMDs and how that impacts your distribution requirements.
- Consult a Professional: Seek guidance from a financial advisor or tax professional to navigate the rules’ complexities and strategically plan your withdrawals.
- Stay Informed: Keep up with IRS updates, as regulations can change. Be prepared to adjust your distribution plans as needed.
Inherited IRAs vs Inherited Retirement Account RMD (401k, TSP, 403b, etc)
Inherited IRAs offer opportunities for financial growth, but understanding and complying with the rules is essential. Careful planning can help you minimize taxes, maximize the benefits of the inheritance, and avoid penalties. However, the same cannot be said for employer sponsor plans. Each plan may have its own rules, and you may be unable to keep the funds within the retirement plan. For example, the TSP will allow a spousal beneficiary to keep a beneficiary account. However, non-spousal beneficiaries may be given a short time frame to move the assets or face a lumpsum taxable distribution.
Reach Out to Us!
If you have additional federal benefit questions, contact our team of CERTIFIED FINANCIAL PLANNER™ (CFP®) and Chartered Federal Employee Benefits Consultants (ChFEBC℠). At PlanWell, we are federal employee financial advisors with a focus on retirement planning. Learn more about our process designed for the career fed.
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