The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) changed the rules for taking distributions from retirement accounts inherited after 2019. The so-called 10-year rule generally requires inherited accounts to be emptied within 10 years of the original owner's death, with some exceptions. This reduces the ability of many beneficiaries to spread out—or “stretch”—distributions from an inherited defined contribution plan or an IRA.
In 2022, the IRS issued proposed regulations that interpreted the revised required minimum distribution (RMD) rules. Final regulations have now been issued and are generally applicable starting in 2025. Under these regulations, some beneficiaries could be subject to annual required distributions as well as a full distribution at the end of a 10-year period. Account owners and their beneficiaries should familiarize themselves with these changes and how they might be affected by them.
RMD basics for account owners
If you own an individual retirement account (IRA) or participate in a retirement plan like a 401(k), you generally must start taking RMDs for the year you reach your RMD age. RMD age is 70½ (if born before July 1, 1949), 72 (if you reach age 72 after 2022), 73 (if you reach age 72 in 2023 or later), or 75 (if you reach age 75 beginning in 2033). If you are still working for the employer that maintains the retirement plan, you may be able to wait until the year you retire to start RMDs from that account. These ages apply only if you own the qualified retirement account, not if you inherit the account.
The required beginning date (RBD) for the first year you are required to take a lifetime distribution is no later than April 1 of the next year. After your first distribution, annual distributions must be taken by the end of each year. (Note that if you wait until April 1 to take your first-year distribution, you would have to take two distributions for that year: one by April 1 and the other by December 31.)
Lifetime distributions are not required from your Roth IRA.
Inherited qualified retirement accounts
When you die, the RMD rules also govern how quickly your retirement plan or IRA will need to be distributed to your beneficiaries. The rules are largely based on two factors: (1) the individuals you select as beneficiaries of your retirement plan, and (2) whether you pass away before or on or after your RBD.
Who is subject to the 10-year rule?
The SECURE Act created eligible designated beneficiaries (EDBs). These include your surviving spouse, your minor children, any individual not more than 10 years younger than you, and certain disabled or chronically ill individuals. Generally, EDBs are able to take annual required distributions based on remaining life expectancy. However, once an EDB dies, or once a minor child EDB reaches age 21, any remaining funds must be distributed within 10 years.
What if your designated beneficiary is not an EDB?
Significantly, though, the SECURE Act requires that if your designated beneficiary is not an EDB, the entire account must be fully distributed within 10 years after your death.
If you die before your RBD, no distributions are required during the first nine years after your death, but the entire account must be distributed in the year.
If you die on or after your RBD, RMDs are now required in the first nine years after the year of your death, then the remainder of the account must be distributed in the 10th year. And yes, non-eligible designated beneficiaries are required to deplete inherited Roth IRAs within the 10-year window.
Relief for certain RMDs from inherited retirement accounts for 2024
Failing to take an RMD can be costly: a 25% penalty generally applies to the extent an RMD is not made.
The IRS has announced that it will not assert the penalty tax in certain circumstances where individuals affected by the RMD changes failed to take annual distributions in 2024 during one of the 10-year periods. Similar relief was previously provided for 2021, 2022 and 2023. Relief might also be available if an EDB died in 2020, 2021, 2022 or 2023 and annual distributions were not taken in 2021, 2022, 2023 or 2024 as required (during the 10-year period following the EDB's death).
The rules relating to required minimum distributions are complicated, and the consequences of making a mistake can be severe. If you inherited a retirement account in the last few years, you need to take action. Talk to a tax professional to understand how the rules, and the new regulations, apply to your individual situation.
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This is not intended to provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients should obtain their own independent tax advice based on their particular circumstances.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
This presentation is for general information purposes only. It does not take into account the particular investment objectives, restrictions, tax and financial situation or other needs of any specific client.