Attention taxpayers…the Treasury and IRS have published final regulations on RMDs for non-spouse beneficiaries. Let’s dive into the details.

RMD- important background

Your required minimum distribution (RMD) is the minimum amount you must withdraw from your qualified retirement account each year. Check out our whitepaper, Your Guide to RMDs for the details, including withdrawal requirements, penalties for missing the deadlines and more.

What are the rules for inherited IRAs?

Under previous guidance, non-spouse beneficiaries had a few options when inheriting an IRA. One option was to opt to take RMDs from inherited IRAs over their life expectancy, instead of taking all the money within five years. This was known as the “stretch IRA” strategy.

The SECURE Act eliminated the stretch IRA option and changed the 5-year rule to 10-years. Most non-spouse beneficiaries are now required to take RMDs ratably from accounts inherited from owners who died after 2019 within 10 years after the account owner’s death.

What's new? What are the final regulations?

The final regulations confirm that if someone dies after starting their required yearly RMDs, their non-spouse beneficiary is required to continue receiving those yearly distributions.

This comes after comments the IRS received suggesting that if a person who started taking RMDs passes away, their beneficiaries should not have to keep taking those annual distributions as long as the account is fully distributed within 10 years. The IRS rejected this proposal and affirmed that RMDs must be taken annually and that the account be fully distributed within 10 years, upholding their original position.

Any exceptions?

The final rules DO NOT apply to “eligible designated beneficiaries” who inherit IRAs. That group includes spouses, minor children, disabled or chronically ill individuals and individuals no more than 10 years younger than the deceased. The new guidance applies to future inheritors and those who have inherited accounts since 2020.

Surviving spouses still have the following options when inheriting an IRA:

1. Roll the inherited IRA assets into their own IRA, if one exists. This is called a spousal rollover.
2. Relocate assets into a newly formed inherited IRA that is properly-titled.
3. Renounce all or part of the assets in the IRA, leaving the assets to the contingent beneficiary or the decedent’s estate if a contingent beneficiary is not named.

Additionally, if the IRA owner died before the required RMD age (73 as of now), the surviving spouse can elect to delay RMDs until he/she turns 73.

What are the penalties for missed withdrawals?

The penalty for missed withdrawals is now 25% of the amount that should have been withdrawn (cut from previous 50% penalty).

What should non-spouse beneficiaries do now to prepare for the changes?

The final regulations become effective on September 17, 2024. However, the IRS has provided transitional relief for beneficiaries that did not take RMDs from their inherited IRAs in 2021 through 2024. Starting in 2025, the 25% penalty will be assessed for those that do not take their RMD.

The 10-year withdrawal period begins on the date of the decedent’s death. Beneficiaries won’t need to take retroactive RMDs if the date of death occurred in 2020 through 2024. If you inherited an IRA in 2020 through 2024 and did not take RMDs during that time, you won’t be penalized.

However, you should prepare to start taking distributions in 2025, ratably, over the applicable remaining 10-year period. For example, if the date of death was in 2020, you must take sufficient RMDs in 2025 through 2030 and ensure the entire amount in the account is distributed by the end of 2030.

You can access the full final regulations here: https://www.federalregister.gov/documents/2024/07/19/2024-14542/required-minimum-distributions.

The rules surrounding inherited IRAs are complicated. We can help!