Key Updates to IRS Regulations on Inherited IRAs and RMDs:
The IRS has issued final regulations on the Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted in late 2019.
Overview of Current Rules
Under the SECURE Act, non-spouse beneficiaries of IRAs are required to fully distribute the balance of their inherited IRAs within 10 years of the account holder’s death. This marked a significant change from the previous rules, which allowed beneficiaries to stretch the required minimum distributions (RMDs) over their life expectancy. The SECURE Act aimed to accelerate the distribution and taxation of inherited IRAs by implementing the 10-year rule. This rule applies to most IRAs inherited after 2019, both traditional and Roth IRAs. Click here to read a more detailed post I’d written on inherited IRAs that addresses some other issues to be planned for.
Clarification on Annual RMDs
There had been considerable confusion and speculation about whether annual RMDs would be required for beneficiaries under the 10-year rule. The proposed regulations issued in 2022 suggested that annual RMDs might be necessary, which led to uncertainty and debate. The final regulations confirm that for inherited IRAs where the original owner had already begun taking RMDs, annual distributions are indeed required for the first nine years, with the entire account needing to be distributed by the end of the 10th year. This clarification helps to remove any ambiguity regarding the distribution requirements under the SECURE Act.
Two Groups of Inherited IRAs
The regulations divide inherited IRAs into two groups. The first group consists of IRAs whose original owners had not begun taking required minimum distributions (RMDs). Beneficiaries of these accounts can distribute the inherited IRA on any schedule, as long as the entire account is fully distributed by the end of the 10 years.
The second group consists of IRAs whose original owners had already begun taking RMDs. Beneficiaries of these accounts must continue taking annual RMDs based on the deceased owner's schedule for the first nine years. The entire account must be distributed by the end of year 10.
Roth IRAs
For Roth IRAs, original owners are not required to take RMDs. Therefore, their beneficiaries are only required to fully distribute the Roth IRA by the end of the 10-year period, with no annual RMDs during the first nine years.
Annual RMDs Starting 2025
The IRS stated that it would not make the annual RMD mandate retroactive. The requirement for annual RMDs will begin in 2025, ensuring no penalties for failing to take RMDs from 2021 to 2024.
Impact on Retirement Planning
These new regulations make managing inherited IRAs and retirement accounts more complex. I’ve been seeking clarity on these rules to offer precise guidance to my clients. While the regulations address several uncertainties, they highlight the changing landscape of retirement planning and the need for specialized knowledge in handling these tax rules.
Starting in 2025, if you inherited an IRA from a parent or non-spouse who had already begun taking RMDs (they were over 72 at the time of their passing), you will need to continue taking RMDs based on the rate they were using. This means the older they were when they passed, the higher the percentage of the account you’ll need to distribute each year. This requirement is unavoidable and will result in income taxes on the distributed amount, which I can withhold for you. The RMD amount will be automatically calculated by my firm to ensure accuracy. This will affect your total income for the year and your tax planning strategy.
You can be sure that if this affects you, I will be reaching out soon to discuss and we’ll determine if it means we need to make any changes to our strategy.
Source: https://www.federalregister.gov/documents/2024/07/19/2024-14542/required-minimum-distributions
Individuals are encouraged to consult their tax and legal advisors (a) before establishing a Retirement Account, and (b) regarding any potential tax, ERISA and related consequences of any investments or other transactions made with respect to a Retirement Account. Tax laws are complex and subject to change. Steward Partners does not provide tax or legal advice.
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