IRS Finalizes Guidance on RMDs From Inherited Retirement Accounts
Published on by Mark Hamad in Estate Planning, Tax Services
The SECURE Act, which was passed in December of 2019, brought significant changes to retirement accounts, specifically to the treatment of inherited retirement accounts – including eliminating the so-called “stretch IRA,” and adding a new 10-year “clean out” rule that requires beneficiaries from inherited retirement accounts to fully distribute the account by the end of the 10th year.
For years, beneficiaries and advisors have been working with the IRS’ proposed regulations regarding the SECURE Act’s provisions. In these proposed regulations, not only were beneficiaries subject to the 10-Year Rule mentioned above, but they were also subject to a new Required Minimum Distribution (RMD) rule: If the original account owner had been previously subject to RMDs, that would require the beneficiary to be subject to the same RMDs over the 10-year period, with the account being completely emptied by the 10th year.
A state of confusion
Since these were proposed rather than final regulations, there was much confusion in the tax and financial planning world on whether beneficiaries should or should not begin taking RMDs for inherited retirement accounts, and whether any missed RMDs would be subject to penalties. Due to the nature of the proposed regulations, the IRS waived any penalties for non-compliance with RMDs from inherited accounts for the tax years 2021-2024.
A long time coming
On July 18, 2024, the IRS issued the long-awaited final regulations. In the 260-page final regulation document, the IRS confirmed the proposed regulations: that non-eligible designated beneficiaries must empty inherited retirement accounts within the 10-year period of the account holder’s death, instead of stretching the distributions over their lifetime. The final regulations also confirm the requirement for non-eligible designated beneficiaries to take RMDs annually over that 10-year period.
Starting in 2025, all non-eligible designated beneficiaries must take annual RMDs throughout the 10-year period and then fully distribute the account by the end of the 10th year if the decedent died on or after their Required Beginning Date (RBD). That means if the decedent was already taking RMDs, the beneficiary must continue those RMDs over the 10-year period (the beneficiary would not be able to “turn off the RMD spigot,” if you will). If the decedent died before their RBD, no RMDs would be required over the 10-year period – though the account would still need to be emptied by the end of the 10th year.
An interesting predicament for beneficiaries
These final regulations put a large number of taxpayers in an interesting tax predicament related to inherited retirement accounts. On one hand, taxpayers could potentially take minimum RMDs over 10 years and then fully distribute the account in year 10 – potentially placing them in a much higher tax bracket in that 10th year if they decide to wait to distribute the entire balance in the final year.
On the other hand, taxpayers could distribute more of the account each year and slowly draw down the account value, so there is not a significant jump in income in year 10 – but this would cause higher taxes in years one through nine.
Let’s talk.
All taxpayers’ situations are unique, and successfully navigating the intricacies and complexities of the new final regulations calls for in-depth professional insight. If you have questions or think it’s time to take a closer look at your tax situation, the Barnes Dennig team of top tax pros is here to help.
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