In July 2024, the IRS and Treasury Department provided long-awaited clarity regarding required minimum distributions.
For reference, the SECURE Act that was passed in 2020 removed the ability for the majority of non-spouse beneficiaries to spread out RMDs throughout the remainder of their lifetimes. Instead, the law required “non-eligible designated beneficiaries” to deplete the inherited account within 10 years. (Specifically, by December 31 of the 10th year after the IRA owner’s death.)
When the rule went into effect, many thought it would eliminate annual RMDs for inherited accounts, but the IRS disagreed. Due to this confusion, the IRS waived RMDs for inherited IRAs from 2021-2024, although this timeframe still applies to the 10-year period for final withdrawal.
In the newly released guidance, the IRS employed a rule that requires that the RMDs must be taken “at least as rapidly” as the original owner had been taking them (if the original owner had reached their required beginning date [RBD] before their death).
Notably, prior to the SECURE Act, the RBD was set at April 1 of the year following the year the IRA owner turned age 70½. As part of the SECURE Act, the RBD changed to April 1 of the year the IRA owner turned 72 — but only for IRA owners born on or after July 1, 1949. Later, with the SECURE 2.0 Act, the RBD increased to age 73 for those who were born in 1950 or after.
Here’s an example of the 10-year rule for inherited IRAs and inherited Roth IRAs: If the original owner dies in 2024 on or after their required beginning date, then RMDs must be withdrawn each year starting in 2025. Any remaining balance would then have to be distributed by December 31, 2034.
However, if the original owner died prior to their required beginning date, the beneficiaries would not be required to take RMDs. That said, any remaining balance would still have to be distributed by the end of the 10th year. In this case, the effect of RMDs for inherited IRAs is limited, which may be especially beneficial in the event that the original owner of the IRA was fairly young when they passed.
In an attempt to clarify the variety of complicated scenarios, Jeff Levine, CPA/PFS, CFP®, created a “beneficiary family tree.” Essentially, inherited IRA and inherited Roth IRA beneficiaries have to withdraw annual RMDs during the 10-year period following the original owner’s passing if the original owner was required to take them at the age of their death. Additionally, non-eligible designated beneficiaries must always deplete any remaining balance by the end of the 10th year.
That said, it is still possible for certain eligible designated beneficiaries — such as spouses, minor children and disabled beneficiaries (with some exceptions) — to stretch out the IRA. For instance, eligible designated beneficiaries could include non-spouse individuals if the beneficiary isn’t more than 10 years younger than the account owner, such as a sibling who is named as the beneficiary.
Be sure to note the difference between inherited Roth IRAs and inherited traditional IRAs:
- Inherited Roth IRAs: The 10-year rule applies, but RMDs are not required, regardless of when the original owner passes.
- Inherited Traditional IRAs: The 10-year rule applies and RMDs must be taken if the original owner passed away on or after their required beginning date. Then, the RMD would be based upon the age of the beneficiary (see the Single Life Expectancy Table). Non-eligible designated beneficiaries would then be required to take RMDs “at least as rapidly” as the original owner had been taking them (in terms of frequency, not amount).
For more information, below are additional resources on the topic:
