By Akemi Kondo Dalvi, CPA/PFS™, CFP®
It seems everyone knows that the IRS rules about required minimum distributions (RMDs) have changed, yet no one is crystal clear about what the rules changed to. In July 2024, the IRS released the final regulations for RMDs in an effort to clarify this subject.i
Recollecting, prior to the SECURE Act of 2020, people had to take a required minimum distribution (RMD) from retirement accounts like 401Ks or IRAs at age 70½ years old. The first RMD was due on April 1 of the year following the year in which the qualified account owner turned age 70½.
The SECURE Act of 2020 changed the required beginning date (RBD) or the first year in which a person must take a retired distribution, to the year in which the IRA owner turns age 72, for those born on or after July 1, 1949.
Then the SECURE Act 2.0 of 2022 further pushed back the RBD, requiring IRA owners to take the first RMD at age 73 for those who turned age 72 in 2023. Additionally, starting in 2033, the RBD age will increase to age 75.ii
While the above is confusing, the RBD rules for IRA owners have not changed since its issuance in 2022. However, inherited IRA RMD rules were less clear and just recently settled in the 2024 Final Regulations.
Prior to the SECURE Act of 2020, non-spouse beneficiaries of inherited IRAs had the option of extended deferral, meaning they could take RMDs from the inherited IRA over their life expectancy, calculated based on their age. Because of this rule, if an IRA beneficiary only withdrew the minimum annually and the investment return on the IRA exceeded the average annual RMD, an IRA could essentially provide benefits to multiple generations, giving rise to the term, Stretch IRA.
SECURE Act of 2020 passed legislation that replaced the Stretch IRA with the 10-year distribution rule for non-eligible designated beneficiaries (NEDB). The 10-year rule required beneficiaries to withdraw all funds within the IRA by the end of the 10th year following the original IRA owner’s death – hence the nickname, Death of the Stretch IRA. NEDBs are beneficiaries who are neither the original IRA owner’s spouse, nor do they fall into limited categories (i.e.: minor child of the deceased, disabled person, individual not more than 10 years younger than the original account owner, etc.) that would allow for more beneficial IRA inheritance treatment.iii
At onset, there was no mention that the inherited IRA beneficiary would need to take annual RMDs during years one through ten following the original owner’s death. In February 2022, the IRS issued proposed regulations that segmented beneficiaries into categories with distinct distribution rules. One of those groups were beneficiaries who inherited an IRA from an owner who died on or after their required beginning date (RBD), or the date in which they needed to start taking required minimum distributions (RMDs).
According to the 2022 proposed regulations, beneficiaries who inherited an IRA from an owner past their RBD became subject to both the 10-year distribution rule, and were responsible for taking annual RMDs during years one through 10.
By the time the IRS regulation was issued, two years had passed since the SECURE Act of 2020, leaving many in violation who had not taken annual RMDs on inherited IRAs from 2020-2022. As such the IRS issued subsequent IRS Notices 2022-53 and 2023-54, waiving penalties to those who missed inherited IRA RMDs for years 2020-2023, when the rules were not clear.
In July 2024, the final regulations made clear the future inherited IRA RMD rules, and failure to adhere will finally draw IRS penalties. In the regulation, the IRS states that NEDBs must take annual RMDs for years one through 10, if the original owner died on or after their required beginning date.
The RMD distribution percentage for years one through 10 follows the old Stretch IRA RMD rules, meaning the annual inherited IRA RMD is based on their life expectancy. However, the full remainder IRA balance must be distributed by the 10th year following the original IRA owner’s death.
In the case of a traditional pre-tax IRA, each of the annual distributions from the inherited IRA are taxed as ordinary income. In such a case, if the inherited IRA beneficiary was trying to spread out taxes evenly over years one through 10, they may want to take distributions that equate to 10% of the IRA balance annually, rather than taking the minimum RMD under the Stretch IRA rules.
For NEDBs who inherited a retirement account from someone who died before their RBD, such beneficiaries do not need to take distributions in years one through 10. Rather, they must simply empty the entire balance of the inherited retirement account by the end of the 10th year after the original owner’s death. Again, taxation on the final distribution should be considered with a CPA when creating a distribution plan.
Earlier this year, IRS issued Notice 2024-35, which effectively waived the annual Stretch RMD requirement during the 10-year rule for affected beneficiaries for tax year 2024. Therefore, 2025 will be the first year in which the finance world attempts to adhere to the new NEDB RMD rules. Despite the delay in which the first inherited IRA RMD must be taken, the 10-year time clock remains for those who passed after 2020.
In other words, if an IRA owner passed in 2021, their NEDB must withdraw the full IRA balance by 2031, even if no RMDs have been taken to date.iv
Pivoting to a new topic, a minor child of the original IRA owner would qualify as an eligible beneficiary. As such, the minor child is eligible to defer their inherited IRA RMD until the age of majority. The 2024 final regulations confirmed that the age of majority nationwide will be 21 (prior, different ages by state). At age 21, the beneficiary will transition to become a non-eligible designated beneficiary and therefore will be subject to the 10-year distribution rule, with final distribution at age 31.
The final regulations also make it clear that Roth IRA owners never reach their RBD, as Roth IRAs are not subject to RMDs. Therefore their beneficiaries always have the 10-year distribution rule and they are not subject to taking IRA RMDs during years one through 10 after the original owner’s death, but they must fully distribute the inherited Roth IRA by the 10th year.
As a final reminder, just because an inherited IRA beneficiary doesn’t have to take an annual RMD this year, that doesn’t mean they shouldn’t. Consult a Certified Financial Planner or a CPA/PFS to understand the tax implications of the various distribution options available to you and ensure that you are making the right decision for your individual circ*mstances.
i. https://public-inspection.federalregister.gov/2024-14542.pdf
ii. https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
iii. https://www.irs.gov/publications/p590b
iv Jeff Levine, Buckingham Strategic Partners IRS Issues Long-Awaited SECURE Act Final Regulations
The opinions expressed above are solely those of Kondo Wealth Advisors, Inc. (626-449-7783, info@kondowealthadvisors.com), a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, Inc. nor its representatives provide legal, tax or accounting advice.
