IRS Finalizes 10-Year RMD Rules for Inherited IRAs

By Anne Christopulos

The Secure Act, which was passed in 2019 and updated in 2022, made major changes to the rules regarding required minimum distributions (RMDs) from retirement plans, including IRAs, 401(k)s, and 403(b)s. Under prior law, non-spouse beneficiaries of a Traditional IRA had the option of “stretching out” distributions over their own life expectancies. With a few, very narrow exceptions, including minor children, the SECURE Act requires most non-spouse beneficiaries to withdraw the entire inherited IRA within 10 years. Of course, a spouse who inherits an IRA will continue to be able to roll over the IRA money to his or her own IRA and treat it as such.

However, it was not clear until July 2024 if a non-spouse beneficiary would be required to make RMDs each year or could wait until the end of the 10-year period to withdraw it all. The IRS issued final rules in July 2024, as follows:

• If RMDs had not begun by the original owner, which would be the case if the owner had not yet reached the age of 73 (rising to age 75 in 2033), no distributions are required until the end of the 10-year period. While waiting may be beneficial in maintaining the tax-deferred status of the money for as long as possible, withdrawing a large sum of money in the same year might put the beneficiary in a higher tax bracket.

• If RMDs had started, the beneficiary must take at least an annual RMD based on his or her own life expectancy starting in the first calendar year after the date of death and continuing through year 9, using the factor shown in the IRS life expectancy tables. Any remaining money must then be withdrawn by the end of the 10th year. If the original IRA owner died in 2020, 2021, 2022, or 2023, the IRA beneficiary does not have to make up the missed payments, but must start annual withdrawals in 2025 and continue through year 9 of the original ten-year period, then withdraw the rest in year 10. The amount required is determined by using the life expectancy factor from the table and subtracting 1 for each year missed.

In addition to the surviving spouse, there are other exceptions to the 10-year rule:

• Beneficiaries who are minor children of the original owner are not initially subject to the 10-year rule, but once they reach the age of 21, the rule applies.

• A non-spouse beneficiary who is not more than ten years younger than the original owner or a beneficiary who is disabled or chronically ill can stretch annual withdrawals over their own life expectancy.

Important note: The original owner’s own RMD for the year of death must be withdrawn by the end of that year, if not already taken. If there are multiple beneficiaries, the amount can be split among them, either proportionately or not.

There is a 25% penalty for not making required distributions, which is reduced to 10% if corrected within two years.

If you have questions about Required Minimum Distributions or any other topics, please reach out any time, (413) 256-1225 x2 or info@westbranchcapital.com

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