IRS Issues Final Regulations Surrounding RMDs for Inherited IRAs

Beneficiaries of Inherited IRAs

If you inherited an IRA after December 31, 2019, or are set to inherit one soon, you need to know that the rules surrounding IRA inheritances have become more complicated for some designated beneficiaries. Most notably, a “10-year rule” applies to most non-spousal beneficiaries who receive inherited retirement accounts. This rule requires that beneficiaries of IRAs must liquidate the entire account by the end of the 10-year anniversary of the IRA owner’s death.

Treasury regulations require that beneficiaries under this 10-year clock, who inherit from an IRA owner who died after their Required Beginning Date, to take annual Required Minimum Beneficiary Distributions (RMBDs) in years 1-9. When these regulations were proposed, taxpayers were unsure if they were required to follow them and take an annual RMBD.

Now, final regulations (TD 10001) have been released which move forward with the proposed rules and will require RMBDs starting 2025.

Deaths After Original Owner’s Required Beginning Date

The 10-year rule went into effect for most non-spousal beneficiaries who inherit IRAs after December 31, 2019. Most industry professionals believed that the 10-year rule only required the account to be fully distributed by the end of the 10th year, without annual distributions. The proposed 2022 regulation added a required minimum beneficiary distribution to the equation for a subset of IRA beneficiaries: specifically, designated beneficiaries who inherit from an IRA owner who died after their Required Beginning Date. These beneficiaries would have to make an annual RMBD. If you an inherit from an IRA owner who died before their Required Beginning Date, only the 10-year rule applies, but there’s no RMBD.

RMBDs Now Required for Starting the 2025 Tax Year

RMBDs require you to withdraw funds at a specified amount and if not taken, penalties will apply. Given the uncertainties, lack of final regulations and request for transition relief, the IRS announced over various notices that those who did not take RMBDs in the 2021, 2022, 2023 and 2024 tax years will have penalties waived for not taking the distributions.

In the final regulations released in July 2024, Treasury and IRS addressed that RMBDs must be taken for designated beneficiaries (most non-spouse beneficiaries) starting 2025, and the account must be fully distributed by the end of the 10-year anniversary of the death of the original account owner. In other words – the penalty relief that was granted up to 2024 for not taking RMBDs will no longer be in effect starting the 2025 tax year.

What you should do

If this all sounds confusing, that’s because it is. If you inherited an IRA after December 31, 2019, and you’re unsure if or how this applies to you, meet with your financial advisor – and perhaps also a tax professional – to review your situation. They can tell you how to comply with the new rules and how to factor those pesky RMBDs into your long-term financial plan.

Sources: Department of Treasury and IRS - TD 10001, keiter; kiplinger; kitces; putnam wealth management

 

 

Raymond James (USA) Ltd. advisors may only transact business with residents of the states and/or jurisdictions for which they are properly registered. The information above is from sources believed to be reliable, however, we cannot represent that it is accurate or complete and it should not be considered personal tax advice. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related and legal matters.

Raymond James (USA) Ltd., member FINRA/SIPC.