The IRS has issued final rules clarifying the 10-year rule for inherited individual retirement accounts (IRAs), requiring many beneficiaries to take annual required minimum distributions (RMDs). This new guidance, effective in 2025, resolves confusion stemming from the SECURE Act passed five years ago.
Key Takeaways
- The IRS now mandates annual RMDs for most non-spouse beneficiaries of inherited IRAs.
- The new rules apply if the original account holder had already started taking RMDs before their death.
- Beneficiaries must deplete the account within 10 years.
- Certain eligible designated beneficiaries are exempt from the 10-year rule.
- A grace period is provided for missed RMDs from 2021 to 2024.
Annual RMDs for Non-Spouse Beneficiaries
A significant question has been whether non-spouse beneficiaries must take annual RMDs during the 10 years following the original account holder’s death or if they could wait and withdraw the entire amount at the end of the decade. The IRS has confirmed that most beneficiaries must take annual RMDs throughout the 10 years, with the account fully depleted by the end of the tenth year. This rule specifically applies to cases where the original account holder had already started taking RMDs before they passed away.
Exceptions to the Rules
The regulations provide some flexibility regarding annual distributions:
- If the original account holder passed away before reaching their RMD age, beneficiaries have more leeway in timing their withdrawals within the 10-year window.
- However, the account must still be emptied by the end of the 10 years.
Certain eligible designated beneficiaries are generally exempt from the 10-year rule, including:
- 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
While the regulations are finalized, they won’t take effect until 2025. However, for those subject to the new rules, the IRS has provided a grace period. For 2021 through 2024, affected beneficiaries don’t have to take RMDs.
Planning Ahead
For many beneficiaries of inherited IRAs, the era of stretching withdrawals over a lifetime is essentially over. 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.
If you are a current retirement account holder or potential beneficiary, stay informed and adjust your financial planning accordingly as 2025 approaches. Given the complexity of these changes, it’s advisable to consult with a trusted financial advisor or tax professional to help review your estate and tax plans and beneficiary designations.
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