New regulations for inherited IRAs
The IRS has issued final regulations, which are set to take effect in 2025, updating the required minimum distribution (RMD) rules. The 260 pages of final regulations adopt most of the regulations as proposed in 2022, including the regulations that address the distribution rules for inherited IRAs. In the final regulations, the IRS has clarified one of the most frequently asked questions regarding the 10-year rule for inherited IRAs.
That question was whether or not non-spouse beneficiaries had to take annual required minimum distributions (RMDs) during the 10 years following the original account holder’s death, or if they could wait and withdraw the entire balance in the 10th year.
In the recently issued final regulations, the IRS confirmed that most beneficiaries must take annual RMDs throughout the 10 years, with the account fully depleted by the end of the 10th year. A beneficiary who is subject to annual RMDs is one who inherited a retirement account after 2019 and is either of the following:
- A designated beneficiary who inherited a retirement account from a participant who died on or after their Required Beginning Date (RBD). A participants RBD is April 1st of the year following the year they reached their applicable age. This April 1st date is the deadline by which their RMD for their applicable age must be taken. In other words the date their very first Required Minimum Distribution must be taken by.
- A successor beneficiary of an eligible designated beneficiary who was taking life expectancy distributions.
Exceptions to the rules
The regulations do provide some exceptions regarding annual distributions.
If the original account holder passed away before reaching their Required Beginning Date, then beneficiaries will have more discretion in the timing of their withdrawals within the 10-year window, but the account must still be emptied by the end of the 10 years. This means you can wait until the 10th year to distribute out the entire IRA balance if this is the scenario you are in as a beneficiary.
It’s also important to note that rules vary for certain beneficiaries. For example, the following “eligible designated beneficiaries” are generally exempt from the 10-year rule:
- Surviving spouses
- Minor children (under age 21)
- Disabled or chronically ill individuals
- Beneficiaries not more than 10 years younger than the deceased
Penalty relief for missed RMDs
For those subject to the new rules, the IRS knows the transition has been confusing and has provided a grace period for 2021 through 2024 for affected beneficiaries. You will not have to make up the missed RMDs and there will be no penalties on the missed RMDs. The 10-year withdrawal deadline is not extended due to this transition relief. Therefore, a beneficiary who inherited a retirement account in 2020, for instance, must ensure that the account is fully distributed no later than 2030, whether or not they took RMDs for the waived years.
If you are a beneficiary subject to the annual RMD rule, plan how to manage inherited IRA funds over a shorter timeframe, balancing tax implications with your financial needs and goals. Given the complexity of these changes, it’s a good idea to consult with a trusted financial advisor or tax professional to help review your estate and tax plans and beneficiary designations.
Contact us for questions or more information regarding the new regulations.
Dasta & Company CPAs and Consultants