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 ten years of the original owner's death, with some exceptions. Where an exception applies, the entire account must generally be emptied within ten years of the beneficiary's death or ten years after a minor child beneficiary reaches age 21. This reduces the ability of most 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. They adopted the proposed regulations while reflecting some changes made by the SECURE 2.0 Act of 2022 and included specific changes in response to comments received on the proposed regulations. Under these regulations, some beneficiaries could be subject to annual required distributions and a full distribution at the end of 10 years. Account owners and their beneficiaries may want to familiarize themselves with these changes and how they might affect them.
RMD basics
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 born July 1, 1949, through 1950), 73 (if born in 1951 to 1959), or 75 (if born in 1960 or later). 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. Failing to take an RMD can be costly: a 25% penalty tax (50% before 2023) generally applies to the extent an RMD is not made.
The required beginning date (RBD) for the first year you must take a lifetime distribution is no later than April 1 of the following year. After your first distribution, annual distributions must be taken by the end of each year. (If you wait until April 1 to take your first-year distribution, you must take two distributions for that year: one by April 1 and the other by December 31.)
Lifetime distributions are not required from Roth accounts, and as a result, Roth account owners are always treated as dying before their RBD. Before 2024, these two special rules for Roth accounts applied to Roth IRAs but not to Roth employer retirement plans.
When you die, the RMD rules also govern how quickly your retirement plan or IRA must be distributed to your beneficiaries. The rules are primarily based on two factors: (1) the individuals you select as beneficiaries of your retirement plan and (2) whether you pass away before or after your RBD.
Who is subject to the 10-year rule?
The SECURE Act still allows particular beneficiaries to "stretch" distributions somewhat. These eligible designated beneficiaries (EDBs) include your surviving spouse, minor children, any individual not more than ten years younger than you, and certain disabled or chronically ill individuals. Generally, EDBs can 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 ten years.
Significantly, though, the SECURE Act requires that if your designated beneficiary is not an EDB, the entire account must be fully distributed within ten years after your death.
What if your designated beneficiary is not an EDB?
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 10th year.
If you die on or after your RBD, annual distributions based on remaining life expectancy are 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. Annual distributions after your death will be based on the greater of (a) what would have been your remaining life expectancy or (b) the beneficiary's remaining life expectancy.
What if your beneficiary is a non-spouse EDB?
After your death, annual distributions will be required based on the remaining life expectancy. If you die before your RBD, required annual distributions will be based on the EDB's remaining life expectancy. If you die on or after your RBD, annual distributions will be based on the greater of (a) what would have been your remaining life expectancy or (b) the beneficiary's remaining life expectancy.
After your beneficiary dies or your beneficiary, who is your minor child, turns age 21, annual distributions based on remaining life expectancy must continue during the first nine years after the year of such an event. The entire account must be fully distributed in the 10th year.
What if your designated beneficiary is your spouse?
There are many special rules if your spouse is your designated beneficiary. The 10-year rule generally has no effect until after your spouse's death or possibly after the death of your spouse's designated beneficiary.
What life expectancy is used to determine RMDs after you die?
Annual required distributions based on life expectancy are generally calculated each year by dividing the account balance as of December 31 of the previous year by the applicable denominator for the current year (but the RMD will never exceed the entire account balance on the distribution date).
When your life expectancy is used, the applicable denominator is your life expectancy in the calendar year of your death, reduced by one for each subsequent year. When the non-spouse beneficiary's life expectancy is used, the applicable denominator is that beneficiary's life expectancy in the year following the calendar year of your death, reduced by one for each subsequent year. (The entire account must be distributed if the applicable denominator is reduced to zero in any year using this "subtract one" method.) And at the end of the appropriate 10-year period, any remaining balance must be distributed.
Relief for certain RMDs from inherited retirement accounts for 2024
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.) For example, relief may be available if the IRA owner or employee died in 2020, 2021, 2022, or 2023 and on or after their RBD and the designated beneficiary who is not an EDB did not take annual distributions for 2021, 2022, 2023, or 2024 as required (during the ten years following the IRA owner's or employee's death). 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 ten years following the EDB's death).
The rules relating to required minimum distributions are complicated, and the consequences of making a mistake can be severe. Talk to us to understand how the rules and the new regulations apply to your situation.
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