by Rick Sparkman
Pathfinders Wealth
The Internal Revenue Service (IRS) and the Treasury Department have issued the final rules for required minimum distributions (RMDs) for beneficiaries under the 10-year rule, effective September 17, 2024. These rules affect beneficiaries of retirement accounts, mandating annual distributions with the requirement to deplete the entire account within ten years after the original account holder’s death.
Here’s an overview of the finalized rules. More in-depth explanations can be found on the IRS website.
What are the fundamental changes and which accounts are impacted? The new regulations apply to qualified plans, section 403(b) annuity contracts, custodial accounts, retirement income accounts, individual retirement accounts (IRAs) and annuities, and some eligible deferred compensation plans. The final rules reflect changes from the SECURE Act and SECURE 2.0 Act. Despite revisions based on public feedback, the IRS maintains that the final rules closely mirror the proposed regulations from 2022.
How has the annual withdrawal requirement changed? Under the “10-year rule”, beneficiaries must take yearly distributions and deplete the entire account within ten years. This rule applies explicitly when the deceased IRA owner was old enough to be taking RMDs before their death. As of 2024, this age is 73, but it will rise to 75 in 2033.
What are the exceptions spouse beneficiaries? Spouse beneficiaries retain the ability to take over the inherited retirement plan assets and treat them as their own, avoiding the annual withdrawal requirement. Also, certain beneficiaries, including those who are disabled, chronically ill, minor children of the deceased, and others not more than ten years younger than the deceased owner, also benefit from more flexible distribution rules. Other beneficiaries, such as adult children of someone who was of RMD age, are now required to adhere to annual withdrawal rules over ten years, with the amount determined by an IRS life-expectancy table. Failure to withdraw the required amount results in a 25% penalty on the amount that should have been withdrawn.
Summing it up: Initially, tax professionals assumed that under the 10-year rule, beneficiaries could withdraw as little or as much as they wanted until the 10th year. However, in 2022, the IRS imposed annual withdrawal requirements, leading to confusion and a multi-year period of uncertainty. The final rules now confirm the annual withdrawal requirement. Transition and Future Considerations No Penalties for Missed RMDs (2021-2024): In recognition of the confusion caused by the regulatory changes, the IRS will not penalize beneficiaries who missed RMDs in 2021, 2022, 2023, or 2024. However, starting in 2025, beneficiaries must adhere to the annual withdrawal requirements. Strategic Considerations for Beneficiaries: Beneficiaries may want to consider withdrawing more than the RMD to avoid potential tax implications. Large withdrawals in the 10th year could push beneficiaries into higher tax brackets and affect other elements of their tax returns.
Although these rules are final, further adjustments are expected as the IRS continues to address issues not covered by the current regulations. The IRS and Treasury are also seeking public comments on proposed regulations under the SECURE 2.0 Act, indicating ongoing developments in this area.
Financial institutions are beginning to offer tools to assist beneficiaries in complying with the new rules such as IRA RMD calculators. The new RMD rules bring significant changes for beneficiaries of retirement accounts. Understanding these requirements and proactive planning will be crucial for managing inherited retirement assets effectively and avoiding compliance issues. If you need further guidance relative to your specific situation, reach out to me at (248) 487-9148 Mon – Fri 9 AM – 6 PM EST.
