In long-awaited final rules, the IRS has finally clarified the controversial 10-year rule for inherited individual retirement accounts (IRAs). The new guidance, set to take effect in 2025, addresses a key question that has puzzled many advisors and beneficiaries since the passage of the original SECURE Act five years ago.
Here's more of what you should know.
New rules for inherited IRAs
A big question, now answered, had been whether 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 amount at the end of the decade.
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In the recently issued final rules, the IRS 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 applies specifically to cases where the original account holder had already started taking RMDs before they passed away.
Exceptions to the rules
However, the regulations do 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.
- But the account must still be emptied by the end of the 10 years.
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
While the regulations are finalized, they won't take effect until 2025. However, for those subject to the new rules, the IRS knows the transition has been confusing and has provided a grace period. As Kiplinger reported, for 2021 through 2024, affected beneficiaries don’t have to take RMDs.
For more information, see IRS Delays IRA RMDs Again.
Inherited IRA: Bottom Line
For many beneficiaries of inherited IRAs, the era of stretching withdrawals over a lifetime is essentially over. As a result, 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. Also, 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.
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